Stock Option Grants to Target CEOs during Private Merger Negotiations

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 issue these grants. We examine whether these unscheduled options benefit target CEOs receiving them and/or shareholders in the firms granting them. We show that target CEOs obtaining these options are more likely to complete acquisitions and to negotiate lower than expected offers. Consequently, on average, target value drops by 62 dollars for every dollar CEOs receive from unscheduled options. These results have public policy implications related to executive compensation, corporate governance, and securities laws concerning insider trading.

Keywords: Merger negotiations, Option timing, Sarbanes-Oxley

JEL Classifications: G30, G34, J33, K22

Working Paper Series