THE VALUE OF BEING LUCKY: OPTION BACKDATING AND NONDIVERSIFIABLE RISK

The practice of executives influencing their option compensation by setting a grant date retrospectively is known as backdating. Since executive stock options are usually granted at-the-money, selecting an advantageous to coincide with low price will be valuable executive. Empirical evidence shows that backdating grants was prevalent, particularly at firms highly volatile prices. Executives who have the opportunity backdate should take this into account in valuation. We quantify value risk averse lucky strike chosen lowest month. show ex ante gain from ability increases both aversion and volatility, significant magnitude. Our model involves valuing embedded partial American lookback utility indifference key features aversion, inability diversify early exercise.