Will I Get Paid? Employee Stock Options and Mergers and Acquisitions

59 Pages Posted: 19 Mar 2016 Last revised: 5 Jul 2019

See all articles by Ilona Babenko

Ilona Babenko

Arizona State University

Fangfang Du

Arizona State University (ASU) - W.P. Carey School of Business

Yuri Tserlukevich

Arizona State University (ASU)

Date Written: June 3, 2019

Abstract

We analyze how employee compensation contracts of target firms affect merger terms and outcomes. Using unique data from merger agreements, we document that in 80.0% of all M\&A deals at least some of the target's ESOs are canceled by the acquirer and not replaced by new equity-based grants. Contract modifications reduce the value of employee stock options by 38.4% in the average M&A deal. Further, the combined merger returns are larger when employees experience greater losses. Overall, our results indicate that the benefits of reducing the number of employee stock options outweigh potential negative effects on firm value.

Keywords: Mergers and acquisitions, labor contracts, employee stock options, takeover premium, target selection, takeover defenses

JEL Classification: G30, G34, J33

Suggested Citation

Babenko, Ilona and Du, Fangfang and Tserlukevich, Yuri, Will I Get Paid? Employee Stock Options and Mergers and Acquisitions (June 3, 2019). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 486/2016. Available at SSRN: https://ssrn.com/abstract=2749045 or http://dx.doi.org/10.2139/ssrn.2749045

Ilona Babenko (Contact Author)

Arizona State University ( email )

Department of Finance
W.P. Carey School of Business
Tempe, AZ 85287
United States

Fangfang Du

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States

Yuri Tserlukevich

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

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