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On the Importance of Golden Parachutes

Published online by Cambridge University Press:  02 January 2014

Eliezer M. Fich ,
Anh L. Tran  and
Ralph A. Walkling
Eliezer M. Fich
Affiliation:
efich@drexel.edu,
Anh L. Tran
Affiliation:
anh.tran@city.ac.uk, Cass Business School, City University London, 106 Bunhill Row, London EC1Y 8TZ, United Kingdom.
Ralph A. Walkling
Affiliation:
rw@drexel.edu, LeBow College of Business, 3141 Chestnut St, Philadelphia, PA 19104;
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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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 6 , December 2013 , pp. 1717 - 1753
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

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