Some interesting questions come out of America's epidemic of stock options backdating scandals. Like how did the practice begin? And why did it spread so quickly?

One reason would be the close connections between company directors. It's a cosy and incestuous little club. Directors sit on more than one board so a practice that would have been confined to a handful of companies would spread quickly.

These are the findings in a new study Options Backdating and Board Interlocks from two finance professors, John M. Bizjak of Portland State University in Oregon and Michael L. Lemmon of the University of Utah, and University of Utah finance graduate student, Ryan J. Whitby.

The study looked at thousands of publicly traded companies that granted options at any point from 1996 through 2002. It found that stock options backdating seemed to be contagious. In 1996 only 7 per cent of companies in the sample demonstrated evidence of backdating but this had grown to over 40 per cent by 2002. The researchers found that the probability that a company would start backdating rose by up to a half if one of its directors was also on the board of a company that was already backdating options.

The study also found that companies were more likely to engage in backdating when they had younger CEOs and the CEO was also the chair. Backdating was also linked to the stock price volatility although that's hardly surprising because higher volatility provides more opportunities for backdating.

The study is consistent with what I have called the six degrees of separation theory of corporate governance. One that works in the interests of CEOs and directors, instead of investors.

It also suggests there could be hundreds of other companies backdating that we don't know about.