On the Importance of Golden Parachutes
Eliezer M. Fich
Drexel University - Department of Finance
Anh L. Tran
Cass Business School, City University London
Ralph A. Walkling
Drexel University - Lebow College of Business
July 16, 2012
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
In acquisitions, target 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.
Number of Pages in PDF File: 55
Keywords: Golden Parachutes, Acquisitions, Moral Hazard, Reservation Premium
JEL Classification: D82, G34, J33Accepted Paper Series
Date posted: June 25, 2009 ; Last revised: July 31, 2012
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