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Golden Parachutes and the Wealth of Shareholders

44 Pages Posted: 2 Dec 2010 Last revised: 11 Jun 2014

Lucian A. Bebchuk

Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Alma Cohen

Tel Aviv University - Eitan Berglas School of Economics; Harvard Law School; National Bureau of Economic Research (NBER)

Charles C. Y. Wang

Harvard Business School

Date Written: October 2012

Abstract

Golden parachutes have attracted much debate and substantial attention from investors and public officials for more than two decades, and the Dodd-Frank Act mandated a shareholder vote on any future adoption of a golden parachute by public firms. We analyze the relationship that golden parachutes have with expected acquisition premia and with firm value. Integrating into our analysis both the effects on acquisition likelihood and on premia conditional on an acquisition, we find that golden parachutes are associated with higher expected acquisition premia, and that this association is at least partly due to the effect of golden parachutes on incentives. We also find that firms that adopt a golden parachute experience a reduction in their industry-adjusted Tobin’s Q, as well as negative abnormal stock returns both during the inter-volume period of adoption and subsequently.

Keywords: Golden Parachute, Executive Compensation, Corporate Governance, Acquisitions, Takeovers, Acquisition Likelihood, Acquisition Premiums, Agency Costs, Tobin’s Q, Dodd-Frank

JEL Classification: D23, G32, G38, J33, J44, K22, M14

Suggested Citation

Bebchuk, Lucian A. and Cohen, Alma and Wang, Charles C. Y., Golden Parachutes and the Wealth of Shareholders (October 2012). Journal of Corporate Finance, Vol. 25, April 2014, pp. 140-154; Harvard Law School John M. Olin Center Discussion Paper No. 683. Available at SSRN: https://ssrn.com/abstract=1718488 or http://dx.doi.org/10.2139/ssrn.1718488

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)

HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Alma Cohen

Tel Aviv University - Eitan Berglas School of Economics ( email )

Ramat Aviv, Tel Aviv, 69978
Israel

Harvard Law School ( email )

Cambridge, MA 02138
United States
(617) 496-4099 (Phone)
(617) 812-0554 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Charles C. Y. Wang

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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