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: 
486/2016

Date posted :

December 08 2016

Last revised :

July 04 2019
SSRN Share

Keywords

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

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.

Authors

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