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

Published online by Cambridge University Press:  04 June 2020

Ilona Babenko Open the ORCID record for Ilona Babenko [Opens in a new window] ,
Fangfang Du  and
Yuri Tserlukevich
Ilona Babenko*
Affiliation:
Babenko, [email protected], Arizona State University
Fangfang Du
Affiliation:
Du, [email protected], California State University Fullerton
Yuri Tserlukevich
Affiliation:
Tserlukevich, [email protected], Arizona State University
*
Babenko (corresponding author), [email protected]
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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 merger and acquisition (M&A) deals, at least some of the target’s employee stock options (ESOs) are canceled by the acquirer and not replaced by new equity-based grants. Contract modifications reduce the value of ESOs 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 ESOs outweigh the potential negative effects on firm value.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 1 , February 2021 , pp. 29 - 64
Copyright
© Michael G. Foster School of Business, University of Washington 2020

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Footnotes

We thank Jarrad Harford (the editor) and an anonymous referee, as well as Kenneth Ahern (discussant), Jonathan Berk, Andrew Ellul (discussant), Eliezer Fich, Shane Heitzman (discussant), Kathleen Kahle (discussant), Jonathan Karpoff, Hyunseob Kim (discussant), Ron Masulis, Kevin Murphy, Paige Ouimet, Joshua Rauh, Ed van Wesep, and conference and seminar participants at the 2017 American Finance Association Meeting, 2017 Beyster Compensation Symposium, 2016 Labor and Finance Conference, 2016 Labor and Finance Group Meeting, 2016 Tel Aviv Finance Conference, 2017 Florida State University (FSU) SunTrust Beach Conference, 2017 Drexel Corporate Governance Conference, Arizona State University, BEROC Center, University of Alberta, University of New South Wales, and University of Rome III for valuable comments. We are extremely grateful to Joseph Blasi and Doug Kruse for sharing their survey data on individual employees.

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