A fraudulent practice that is usually undertaken by option-holding executives who manipulate the exercise of options to illegally maximize their profitability. To that end, they claim to have exercised their call options at an earlier date with a lower stock price, though the options were actually exercised much later at a higher stock price. This is often the case when executives attempt to reduce taxes on the capital gains produced by exercising the options. By backdating to a date with a lower stock price, the base for calculating taxes due at exercise can be reduced and transformed into gains to be taxed later at lower long-term capital gains rates.

However, and unlike grant backdating that is solely beneficial to executives while detrimental to shareholders, exercise backdating is not necessarily in shareholders’ disinterest, and could be favorable to both parties at the expense of taxpayers. But the potential costs arising from litigation and damage to reputation if backdating is exposed make it possible that the overall costs exceed the benefits. For corporates, exercise backdating represents a costly and self-centered executive conduct enabled by exploitation of an inefficient internal control environment.