On the Importance of Golden Parachutes

55 Pages Posted: 25 Jun 2009 Last revised: 23 Jul 2015

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

Date Written: July 16, 2012

Abstract

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

Fich, Eliezer M. and Tran, Anh L. and Walkling, Ralph A., On the Importance of Golden Parachutes (July 16, 2012). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1425211 or http://dx.doi.org/10.2139/ssrn.1425211

Eliezer M. Fich

Drexel University - Department of Finance ( email )

LeBow College of Business
3220 Market Street – 11th Floor
Philadelphia, PA 19104
(215) 895-2304 (Phone)

Anh L. Tran

Cass Business School, City University London ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44-207-040-5109 (Phone)
+44-207-040-8881 (Fax)

HOME PAGE: http://www.cass.city.ac.uk/experts/A.Tran

Ralph August Walkling (Contact Author)

Drexel University - Lebow College of Business ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
(215) 895-4920 (Phone)
(215) 895-6119 (Fax)

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