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

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

Ilona Babenko, Fangfang Du, Yuri Tserlukevich

Series number :

Serial Number: 

Date posted :

December 08 2016

Last revised :

October 11 2017
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  • mergers and acquisitions • 
  • non-executive compensation • 
  • employee stock options • 
  • Takeover premium • 
  • target selection • 
  • takeover defenses

We analyze how rank-and-file employee compensation contracts of target firms affect the negotiations of merger terms and merger outcomes. Using unique data from merger agreements, we document that in 79.9% of all deals at least some of the target's employee stock options are canceled by the acquirer. Employees lose approximately half of their option value in the average M&A deal.

By exploiting the exogenous variation in option grants, we find that the offer price premium is larger when the target firm has many employee options. Further, the bidders that cancel stock options earn on average 1.6% higher announcement return. We find some evidence of strategic targeting of firms with options. Our results are consistent with the bidders trading off the costs of compensation liabilities against the resistance of employees.


Real name:
Ilona Babenko
Arizona State University
Real name: 
Fangfang Du
Real name: 
Yuri Tserlukevich