A common view of golden parachutes and shark repellents is that they are designed by management to insulate itself from the discipline imposed by the market for corporate control and so are harmful to shareholders. This paper offers an alternative view that these devicesare beneficial to shareholders because they allow better contracting between manager and shareholders. Evidence on the incidence of goldenparachutes and on the compensation-tenure relationship for managers of golden parachute firms supports the alternative view.

The public arrest of Adelphia executives on July 24, 2002 signaled tougher enforcement of laws against corporate crime. On that day and the two following days, foreign firms experienced a cumulative 1.7% decline in value. Relative to domestic firms, the loss was a much larger 4.5%. The expected cost to firms from tougher enforcement suggests three possible reasons. Foreign firms may be targeted more heavily, may face greater penalties, or may find it more costly to react to (deflect) enforcement. We find evidence consistent with foreign firms facing higher costs from tougher enforcement for each of these reasons.

Anup Agrawal, Charles R. Knoeber, Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders, The Journal of Financial and Quantitative Analysis, Vol. 31, No. 3 (Sep., 1996), pp. 377-397

Broiler chickens are raised by contract growers whose rewards depend explicitly upon relative performance. The authors use data on the performance of broiler producers facing both tournament and linear performance evaluation compensation structures to test three predictions from the theory of tournaments: that changes in the level of prizes that leave prize differentials unchanged will not affect performance; that, in mixed tournaments, more able players will choose less risky strategies; and that tournament organizers will attempt to handicap players of unequal ability or reduce mixing to avoid the disincentive effects of mixed tournaments. Their evidence is consistent with each prediction.

A greater threat of takeover has two opposing effects on managerial compensation. The competition effect in the market for managers reduces compensation. The risk effect increases compensation by making managers' implicitly deferred compensation and firm-specific human capital less secure. Using a sample of about 450 large firms, we find that an increase in the threat of takeover from the first to the third quartile reduces a typical CEO's salary and bonus by 22,800–211,600 due to the competition effect, but raises salary and bonus by 41,500–255,300 due to the risk effect. The net effect is an increase of $18,700–43,700.

We argue that outsiders are handicapped (chosen only if markedly better than the best insider) in Chief Executive Officer (CEO) successions to strengthen the incentive that the contest to become CEO provides inside candidates. Handicapping implies are that a firm will be more likely to choose an insider to succeed to the CEO position where insiders are more comparable to each other, where outsiders are less comparable to insiders, and where there are more inside candidates. We assess these predictions using a data set containing more than 1,000 observations on CEO succession in large U.S. firms over the period 1974–1995 and a novel measure of the comparability of insiders that identifies those firms with a product or line of business organizational structure. Our evidence is consistent with each prediction. We also explore more carefully our organizational structure variable. We find that where firms switch to a product or line of business structure (making insiders more comparable) the likelihood of outsider succession falls. And we consider the possibility that managers from firms with a product or line of business structure may be more likely to be chosen CEO because their experience as divisional head better prepares them for a CEO's duties. Two tests suggest that this is not the source of our finding that these firms are more likely to promote insiders to be CEO. The first test finds that controlling for prior experience managing a business (a division or a firm) among inside candidates to be CEO, those firms organized along product lines remain more likely to promote from within. The second test finds that when outsiders are chosen CEO, these outsiders do not come disproportionately from firms with a product or line of business structure.