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
Date Written: September 8, 2015
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: Suggested Citation