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A Safe Landing? Golden Parachutes and Corporate Behavior

University of Michigan Business School Working Paper No. 98015

39 Pages Posted: 9 Oct 1998  

M. P. Narayanan

University of Michigan, Stephen M. Ross School of Business

Anant K. Sundaram

Dartmouth College - Tuck School of Business

Date Written: August 1998

Abstract

The original motivation for golden parachutes was to provide managers the incentive to maximize shareholder wealth without concerns of job loss from change of control. But they may also create the incentive to run down a firm and make it an attractive takeover candidate, especially in the case of poorly performing firms that require substantial turnaround effort. Such concerns led to the U.S. Congress passing laws that limit tax deductibility to golden parachutes and levy additional taxes on such payments. Our study of a sample of 245 first-time golden parachute adopting firms during 1980-94 indicates that such concerns (and the legislation) are misplaced. Regardless of whether they are under- or over-performers prior to parachute adoption, managers do not appear to run down their firms: They do not put the firm up for sale any more often than average, CEO turnover does not increase, and firms' operating, financial and stock performance subsequent to adoption show no evidence of value destruction. In contrast, we find a dramatic increase in both inward and outward corporate control activity, leading us to the conclusion that golden parachutes have simply given managers the confidence (and a cushion) to restructure their firms without having to worry about losing their jobs from the firm being put in play.

JEL Classification: G31, G32, G34, J31, J44

Suggested Citation

Narayanan, M. P. and Sundaram, Anant K., A Safe Landing? Golden Parachutes and Corporate Behavior (August 1998). University of Michigan Business School Working Paper No. 98015. Available at SSRN: https://ssrn.com/abstract=131869 or http://dx.doi.org/10.2139/ssrn.131869

M. P. Narayanan (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-763-5936 (Phone)
734-936-0274 (Fax)

Anant K. Sundaram

Dartmouth College - Tuck School of Business ( email )

100 Tuck Hall
Hanover, NH 03755
United States
603-646-8248 (Phone)
603-646-1308 (Fax)

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