On the Importance of Golden Parachutes

Eliezer M. Fich; Anh Tran; Ralph A. Walkling

doi:10.1017/s002210901300063x

Journal of Financial and Quantitative Analysis Vol. 48 No. 6 2013

On the Importance of Golden Parachutes

Eliezer M. Fich^{1,2,3,4,5,6,7,8}; Anh Tran^{1,2,3,4,5,6,7,8}; Ralph A. Walkling^{1,2,3,4,5,6,7,8}

¹ Binghamton University · ² Fordham University · ³ City, University of London · ⁴ University of Oregon · ⁵ University of South Florida · ⁶ Institut d'Economie Scientifique Et de Gestion · ⁷ Syracuse University · ⁸ Drexel University

Abstract

In acquisitions, target chief executive officers (CEOs) face a moral hazard: Any personal gain from the deal could be offset by the loss of the future compensation stream associated with their jobs. Larger, more important parachutes provide greater relief for these losses. To explicitly measure the moral hazard target CEOs face, we standardize the parachute payment by the expected value of their acquisition-induced lost compensation. We examine 851 acquisitions from 1999–2007, finding that more important parachutes benefit target shareholders through higher completion probabilities. Conversely, as parachute importance increases, target shareholders receive lower takeover premia, while acquirer shareholders capture additional rents from target shareholders.

DOI: 10.1017/s002210901300063x
Volume: 48
Issue: 6
Pages: 1717-1753
Language: en
Sources: bibtex:phds-export.bib openalex crossref

On the Importance of Golden Parachutes

Abstract

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