CEOs change their option exercise patterns when control is under contest. The rate at which CEOs exercise vested options in order to sell (or hold) the resulting shares slows down by 80 per cent (or accelerates by 50 per cent) when a proxy contest is looming, consistent with CEOs’ desire to maintain or strengthen their voting rights when facing control challenges. Such distortions are closely aligned with the institutional details unique to proxy contests, such as the record dates and director nomination status. Moreover, the presence of a proxy contest triples the probability that an insider exercises call options out-of-the money, an extreme strategy deemed unambiguously irrational under the conventional models. The various forms of distortions imply incumbents’ private valuation premium over the market price on the order of 3 per cent to over 20 per cent of stock price, indicating sizeable private benefits of control for the insiders in the targeted companies. Additional tests affirm the connection between the deviations from a normal exercise behaviour and a control motive, which is distinct from other motives documented in the literature including diversification, inside information about future stock prices, and behavioural factors such as overconfidence.
Wei Jiang is Professor of Finance and Economics at Columbia Business School. She is currently the Chair of the Finance sub-division, and served on the faculty advisory boards of the Chazen Institute of International Business, the Heilbrunn Center for Graham & Dodd Investing, and the Richman Center for Business, Law, and Public Policy. Professor Jiang received her BA and MA in international economics from Fudan University (China), and PhD in economics from the University of Chicago in 2001, after which she joined Columbia Business School. She has since taught in the Master, MBA or EMBA programmes at Chicago, Columbia, Wharton, and Berkeley. She was an investment banking associate at Prudential Securities (Shanghai) before pursuing her PhD degree. Professor Jiang’s main research interest lies in the strategies of institutional investors (such as hedge funds and mutual funds) and their role in corporate decisions and financial markets. Her research has been published in top academic journals as well as featured in major media, including the Wall Street Journal, Economist, Institutional Investors, Money, Fortune, Business Week, New York Times and Financial Times. She received the Smith-Breeden Distinguished Paper Prize from the Journal of Finance, multiple best paper prizes from the Western Finance Association, Chicago Quantitative Alliance, UK Inquire, the Q-Group, and the Wharton School Terker Family Prize in Investment Research. Jiang has taught various courses in corporate finance and is a four-time recipient of teaching excellence awards at Columbia Business School since 2005. She is currently the Finance Area Editor of Management Science, and associate editor at the Journal of Finance and Review of Financial Studies.