Stock Option Grants to Target CEOs during Private Merger Negotiations
Posted: 22 Apr 2009 Last revised: 30 Dec 2010
Date Written: November 10, 2010
Abstract
Unscheduled stock options to target CEOs are a non-trivial phenomenon during private merger negotiations. In 920 acquisition bids during 1999-2007, over 13% of targets grant them. These options substitute for golden parachutes and compensate target CEOs for benefits they forfeit because of the merger. Targets granting unscheduled options are more likely to be acquired but they earn lower premiums. Consequently, deal value drops by $62 for every dollar target CEOs receive from unscheduled options. Conversely, acquirers of targets offering these awards experience higher returns. Therefore, deals involving unscheduled grants exhibit a transfer of wealth from target shareholders to bidder shareholders.
Keywords: Merger negotiations, Stock options, Takeover premium
JEL Classification: G30, G34, J33, K22
Suggested Citation: Suggested Citation