The Effects of a Tax Notch on CEO Golden Parachute Contracts and Option Exercises

29 Pages Posted: 27 Nov 2017

See all articles by Robert J. Jackson, Jr.

Robert J. Jackson, Jr.

Professor of Law

Jonathon Zytnick

Columbia University; New York University School of Law

Date Written: October 17, 2017

Abstract

We show that CEO golden parachute contracts are responsive to a tax on golden parachutes, and CEO option exercises are responsive to these contracts. In particular, as a consequence of a tax code provision penalizing parachutes greater than 3 times taxable income, CEO parachute contracts frequently contain “cutback” provisions limiting the parachute to this threshold. When their companies are acquired, CEOs exercise options in bulk to raise their taxable income and boost their threshold. Identification comes from a difference-in-difference-in-difference exploiting a discontinuous change in exercise incentives over time and variation across CEOs in contract incentives and deal timing.

JEL Classification: H26, K34, G34, G38

Suggested Citation

Jackson, Jr., Robert J. and Zytnick, Jonathon, The Effects of a Tax Notch on CEO Golden Parachute Contracts and Option Exercises (October 17, 2017). Available at SSRN: https://ssrn.com/abstract=3075467 or http://dx.doi.org/10.2139/ssrn.3075467

Robert J. Jackson, Jr.

Professor of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

Jonathon Zytnick (Contact Author)

Columbia University ( email )

420 W. 118th Street, MC 3308
New York, NY 10027
United States

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
54
Abstract Views
358
rank
383,921
PlumX Metrics