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Out-of-the-Money CEOs: Private Control Premium and Option Exercises

Review of Financial Studies, Forthcoming

59 Pages Posted: 17 Nov 2013 Last revised: 8 Sep 2015

Vyacheslav Fos

Boston College - Department of Finance

Wei Jiang

Columbia Business School - Finance and Economics

Date Written: September 8, 2015

Abstract

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 challenges. Such deviations are closely aligned with features unique to proxy contests, such as the record dates and nomination status, and are more pronounced when the private benefits are higher or when the voting rights are more crucial. The distortions suggest that incumbents value their stocks higher than the market price when voting rights are valuable for defending control.

Keywords: private benefits of control; proxy contests; insider trading; early option exercise

JEL Classification: G32, G34, G38, J33

Suggested Citation

Fos, Vyacheslav and Jiang, Wei, Out-of-the-Money CEOs: Private Control Premium and Option Exercises (September 8, 2015). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2355084 or http://dx.doi.org/10.2139/ssrn.2355084

Vyacheslav Fos (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

Wei Jiang

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
(212) 854-5553 (Phone)

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