On the Importance of Golden Parachutes
55 Pages Posted: 25 Jun 2009 Last revised: 23 Jul 2015
Date Written: July 16, 2012
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.
Keywords: Golden Parachutes, Acquisitions, Moral Hazard, Reservation Premium
JEL Classification: D82, G34, J33
Suggested Citation: Suggested Citation