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Stock option grants to target CEOs during private merger negotiations

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Author Info

  • Fich, Eliezer M.
  • Cai, Jie
  • Tran, Anh L.

Abstract

Unscheduled stock options to target chief executive officers (CEOs) are a nontrivial phenomenon during private merger negotiations. In 920 acquisition bids during 1999-2007, over 13% of targets grant them. These options substitute for golden parachutes and compensate target CEOs for the benefits they forfeit because of the merger. Targets granting unscheduled options are more likely to be acquired but they earn lower premiums. Consequently, deal value drops by $62 for every dollar target CEOs receive from unscheduled options. Conversely, acquirers of targets offering these awards experience higher returns. Therefore, deals involving unscheduled grants exhibit a transfer of wealth from target shareholders to bidder shareholders.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 101 (2011)
Issue (Month): 2 (August)
Pages: 413-430

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Handle: RePEc:eee:jfinec:v:101:y:2011:i:2:p:413-430

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Web page: http://www.elsevier.com/locate/inca/505576

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Keywords: Merger negotiations Stock options Takeover premium;

References

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Cited by:
  1. Brigida, Matthew & Madura, Jeff, 2012. "Sources of target stock price run-up prior to acquisitions," Journal of Economics and Business, Elsevier, vol. 64(2), pages 185-198.
  2. Heitzman, Shane, 2011. "Equity grants to target CEOs during deal negotiations," Journal of Financial Economics, Elsevier, vol. 102(2), pages 251-271.
  3. Dirk Jenter & Katharina Lewellen, 2011. "CEO Preferences and Acquisitions," CESifo Working Paper Series 3681, CESifo Group Munich.

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