Definition of 'Options Backdating'
The process of granting an option that is dated prior to the date that the company granted that option. In this way, the exercise price of the granted option can be set at a lower price than that of the company's stock at the granting date. This process makes the granted option in-the-money and of value to the holder.
Investopedia explains 'Options Backdating'
This process occurred when companies were only required to report the issuance of stock options to the SEC within two months of the grant date. Companies would simply wait for a period in which the company's stock price fell to a low and then moved higher within a two-month period. The company would then grant the option but date it at or near its lowest point. This is the granted option that would be reported to the SEC.
The act of options backdating has become much more difficult as companies are now required to report the granting of options to the SEC within two business days. This adjustment to the filing window came in with the Sarbanes-Oxley legislation.