Out-of-the-Money CEOs: How Do Proxy Contests Affect Insider Option Exercises
University of Illinois at Urbana-Champaign
Columbia Business School - Finance and Economics
June 3, 2014
Columbia Business School Research Paper No. 13-82
When a proxy contest is looming, the rate at which CEOs exercise options in order to sell (hold) the resulting shares slows down by 80% (accelerates by 60%), consistent with their desire to maintain or strengthen voting rights when facing control challenges. Such deviations are closely aligned with features unique to proxy contests, e.g., the record dates and nomination status. Moreover, a contest triples the probability that an insider exercises options out-of-the-money, an irrational strategy under conventional models. The various distortions suggest that incumbents (with private benefits of control) value their stocks 5% -- 20% higher than the market price.
Number of Pages in PDF File: 55
Keywords: private benefits of control; proxy contests; insider trading; early option exercise
JEL Classification: G32, G34, G38, J33working papers series
Date posted: November 17, 2013 ; Last revised: February 20, 2015
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