Golden Parachutes, Takeover Incentive, and Risk-Taking

48 Pages Posted: 2 Sep 2012 Last revised: 30 May 2014

See all articles by Dong Chen

Dong Chen

University of Baltimore

Morgan J. Rose

University of Maryland, Baltimore County; Office of the Comptroller of the Currency

Date Written: June 9, 2013

Abstract

We examine the relations between golden parachutes (GPs), pay-performance sensitivity (delta), and managerial risk-taking. We find an insignificant effect of GPs, but a negative and significant interaction of GPs with delta, on risk-taking. These results are consistent with the “takeover incentive hypothesis,” an original proposition stating that GPs influence risk-taking through the incentive of a CEO with a GP to accept a takeover, as well as delta’s role in affecting the weight of the CEO’s incentive to maximize the expected takeover-associated equity portfolio wealth. The findings do not support the proposition that GPs influence risk-taking through an insurance effect.

Keywords: golden parachute, corporate governance, risk-taking, pay-performance sensitivity, delta, takeover incentive, entrenchment

JEL Classification: G30, G34

Suggested Citation

Chen, Dong and Rose, Morgan J., Golden Parachutes, Takeover Incentive, and Risk-Taking (June 9, 2013). Midwest Finance Association 2013 Annual Meeting Paper. Available at SSRN: https://ssrn.com/abstract=2140088 or http://dx.doi.org/10.2139/ssrn.2140088

Dong Chen (Contact Author)

University of Baltimore ( email )

1420 N. Charles Street
Baltimore, MD 21201
United States

Morgan J. Rose

University of Maryland, Baltimore County ( email )

1000 Hilltop Circle
Baltimore, MD 21250
United States
410-455-8485 (Phone)

Office of the Comptroller of the Currency

400 7th Street SW
Washington, DC 20219
United States

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