Do Golden Parachutes Matter? Evidence from Firms that Ultimately Filed for Bankruptcy
43 Pages Posted: 14 Apr 2019
Date Written: March 16, 2017
We study bankruptcy outcomes of 275 firms and find that hiring CEOs with golden parachutes (GPs) during financial distress is associated with a lower probability of liquidation. In contrast, firms led by incumbent CEOs with GPs are more likely to be liquidated, as are firms led by new CEOs without GPs. Since GPs are nullified during bankruptcy, the observed relationship cannot be attributed to an explicit incentive effect. Rather, we contend that during financial distress GPs help recruit reputable CEOs who, even without explicit incentives, continue to maximize shareholder value due to implicit reputational and career concerns.
Keywords: Golden parachute, bankruptcy outcome, implicit incentive, CEO compensation, reputational capital, corporate governance
JEL Classification: G33. G34
Suggested Citation: Suggested Citation