Skip to main content

On the Importance of Golden Parachutes

  • Eliezer M. Fich (a1), Anh L. Tran (a2) and Ralph A. Walkling (a3)

In acquisitions, target chief executive officers (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.

Hide All
Agrawal, A., and Knoeber, C.. “Managerial Compensation and the Threat of Takeover.” Journal of Financial Economics, 47 (1998), 219339.
Ahern, K. R. “Bargaining Power and Industry Dependence in Mergers.” Journal of Financial Economics, 103 (2012), 530550.
Aktas, N.; de Bodt, E.; and Roll, R.. “Negotiations under the Threat of an Auction.” Journal of Financial Economics, 98 (2010), 241255.
Bange, M. M., and Mazzeo, M. A.. “Board Composition, Board Effectiveness, and the Observed Form of Takeover Bids.” Review of Financial Studies, 17 (2004), 11851215.
Bargeron, L.; Schlingemann, F.; Stulz, R.; and Zutter, C.. “Why Do Private Acquirers Pay So Little Compared to Public Acquirers?Journal of Financial Economics, 89 (2008), 375390.
Bargeron, L.; Schlingemann, F.; Stulz, R.; and Zutter, C.. “Are Acquisition Premiums Lower Because of Target CEOs’ Conflicts of Interest?” Working Paper, Ohio State University (2010).
Bates, T. W.; Becher, D. A.; and Lemmon, M. L.. “Board Classification and Managerial Entrenchment: Evidence from the Market for Corporate Control.” Journal of Financial Economics, 87 (2008), 656677.
Bates, T. W., and Lemmon, M. L.. “Breaking Up Is Hard To Do? An Analysis of Termination Fee Provisions and Merger Outcomes.” Journal of Financial Economics, 69 (2003), 469504.
Bebchuk, L.; Cohen, A.; and Wang, C.. “Golden Parachutes and the Wealth of Shareholders.” Harvard Law and Economics Discussion Paper No. 683 (2010).
Bebchuk, L., and Grinstein, Y.. “The Growth of Executive Pay.” Oxford Review of Economic Policy, 21 (2005), 283303.
Berkovitch, E., and Khanna, N.. “A Theory of Acquisition Markets: Mergers versus Tender Offers, and Golden Parachutes.” Review of Financial Studies, 4 (1991), 149174.
Black, F., and Scholes, M.. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, 3 (1973), 637654.
Boone, A., and Mulherin, J. H.. “How Are Firms Sold?Journal of Finance, 62 (2007), 847875.
Boschen, J., and Smith, K.. “You Can Pay Me Now and You Can Pay Me Later: The Dynamic Response of Executive Compensation to Firm Performance.” Journal of Business, 68 (1995),577608.
Cheffins, B. “Did Corporate Governance ‘Fail’ during the 2008 Stock Market Meltdown? The Case of the S&P 500.” Business Lawyer, 65 (2009), 165.
Chhaochharia, V., and Grinstein, Y.. “CEO Compensation and Board Structure.” Journal of Finance, 64 (2009), 231261.
Comment, R., and Schwert, G. W.. “Poison or Placebo? Evidence on the Deterrence and Wealth Effect of Modern Antitakeover Measures.” Journal of Financial Economics, 39 (1995), 343.
Cotter, J. F.; Shivdasani, A.; and Zenner, M.. “Do Independent Directors Enhance Target Shareholder Wealth During Tender Offers?Journal of Financial Economics, 43 (1997), 195218.
Cotter, J. F., and Zenner, M.. “How Managerial Wealth Affects the Tender Offer Process.” Journalof Financial Economics, 35 (1994), 6397.
Denis, D. J., and Serrano, J. M.. “Active Investors and Management Turnover Following Unsuccessful Control Contests.” Journal of Financial Economics, 40 (1996), 239266.
Evans, J.; Noe, T.; and Thornton, J. Jr. “Regulatory Distortion of Management Compensation: The Case of Golden Parachutes for Bank Managers.” Journal of Banking and Finance, 21 (1997),825848.
Fama, E., and French, K.. “Industry Costs of Equity.” Journal of Financial Economics, 43 (1997), 153193.
Fich, E. M.; Cai, J.; and Tran, A. L.. “Stock Option Grants to Target CEOs During Private Merger Negotiations.” Journal of Financial Economics, 101 (2011), 413430.
Fich, E. M., and Shivdasani, A.. “Financial Fraud, Director Reputation, and Shareholder Wealth.” Journal of Financial Economics, 86 (2007), 306336.
Francis, B.; Hasan, I.; and Sharma, Z.. “Do Incentives Create Innovation? Evidence from CEO Compensation Contracts.” Working Paper, Rensselaer Polytechnic Institute (2009).
Gompers, P.; Ishii, J.; and Metrick, A.. “Corporate Governance and Equity Prices.” Quarterly Journal of Economics, 118 (2003), 107155.
Grinstein, Y., and Hribar, P.. “CEO Compensation and Incentives: Evidence from M&A Bonuses.” Journal of Financial Economics, 73 (2004), 119143.
Hall, B.; and Liebman, J.. “Are CEOs Really Paid Like Bureaucrats?Quarterly Journal of Economics, 113 (1998), 653691.
Hartzell, J. C.; Ofek, E.; and Yermack, D.. “What’s in It for Me? CEOs Whose Firms Are Acquired.” Review of Financial Studies, 17 (2004), 3761.
Heckman, J. “Sample Selection Bias as a Specification Error.” Econometrica, 47 (1979), 153161.
Huddart, S., and Lang, M.. “Employee Stock Option Exercises: An Empirical Analysis.” Journalof Accounting and Economics, 21 (1996), 543.
Jarrell, G., and Poulsen, A.. “Stock Trading before the Announcement of Tender Offers: Insider Trading or Market Anticipation?Journal of Law, Economics and Organizations, 5 (1989), 223248.
Jensen, M. C., and Meckling, W. H.. “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305360.
Jensen, M. C., and Zimmerman, J. L.. “Management Compensation and the Managerial Labor Market.” Journal of Accounting and Economics, 7 (1985), 39.
Jenter, D., and Lewellen, K.. “CEO Preferences and Acquisitions.” Working Paper, Stanford University (2011).
Knoeber, C. “Golden Parachutes, Shark Repellents, and Hostile Takeovers.” American Economic Review, 76 (1986), 155167.
Lambert, R. A., and Larcker, D. F.. “Golden Parachutes, Executive Decision Making, and Shareholder Wealth.” Journal of Accounting and Economics, 7 (1985), 179203.
Lambrecht, B., and Myers, S.. “A Theory of Takeover and Disinvestment.” Journal of Finance,62 (2007), 809845.
Lefanowicz, C. E.; Robinson, J. R.; and Smith, R.. “Golden Parachutes and Managerial Incentives in Corporate Acquisitions: Evidence from the 1980s and 1990s.” Journal of Corporate Finance, 6 (2000), 215239.
Machlin, J.; Choe, H.; and Miles, J. A.. “The Effects of Golden Parachutes on Takeover Activity.” Journal of Law and Economics, 36 (1993), 861876.
Maddala, G. S. Limited Dependent and Qualitative Variables in Econometrics. Cambridge, MA: Cambridge University Press (1983).
Malatesta, P. H., and Walkling, R. A.. “Poison Pill Securities: Stockholder Wealth, Profitability, and Ownership Structure.” Journal of Financial Economics, 20 (1988), 347376.
Malmendier, U., and Tate, G.. “CEO Overconfidence and Corporate Investment.” Journal of Finance, 60 (2005), 26612700.
Manso, G. “Motivating Innovation.” Journal of Finance, 66 (2011), 18231860.
Masulis, R.; Wang, C.; and Xie, F.. “Corporate Governance and Acquirer Returns.” Journal of Finance, 62 (2007), 18511889.
Moeller, S.; Schlingemann, F.; and Stulz, R.. “Wealth Destruction on a Massive Scale? A Study of Acquiring Firm Returns in the Recent Merger Wave.” Journal of Finance, 60 (2005), 757782.
Moeller, T. “Let’s Make a Deal! How Shareholder Control Impacts Merger Payoffs.” Journal ofFinancial Economics, 76 (2005), 167190.
Officer, M. S. “Termination Fees in Mergers and Acquisitions.” Journal of Financial Economics, 69 (2003), 431467.
Palepu, K. G. “Predicting Takeover Targets: A Methodological and Empirical Analysis.” Journal of Accounting and Economics, 8 (1986), 335.
Rhodes-Kropf, M., and Kadyrzhanova, D.. “Concentrating on Governance.” Journal of Finance, 66 (2011), 16491685.
Rhodes-Kropf, M., and Viswanathan, S.. “Market Valuation and Merger Waves.” Journal of Finance, 59 (2004), 26852718.
Ross, S. A. “Compensation, Incentives, and the Duality of Risk Aversion and Riskiness.” Journal of Finance, 59 (2004), 207225.
Schlingemann, F.; Stulz, R.; and Walkling, R.. “Divestitures and the Liquidity of the Market for Corporate Assets.” Journal of Financial Economics, 64 (2002), 117144.
Schwert, G. W. “Markup Pricing in Mergers and Acquisitions.” Journal of Financial Economics, 41 (1996), 153192.
Shleifer, A., and Vishny, R. W.. “Stock Market Driven Acquisitions.” Journal of Financial Economics, 70 (2003), 295489.
Wang, C., and Xie, F.. “Corporate Governance Transfer and Synergistic Gains from Mergers and Acquisitions.” Review of Financial Studies, 22 (2009), 829858.
White, H. “A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test forHeteroskedasticity.” Econometrica, 48 (1980), 817838.
Wulf, J. “Do CEOs in Mergers Trade Power for Premium? Evidence from Mergers of Equals.” Journal of Law, Economics, and Organization, 20 (2004), 60101.
Yermack, D. “Remuneration, Retention, and Reputation Incentives for Outside Directors.” Journalof Finance, 59 (2004), 22812308.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
Please enter your name
Please enter a valid email address
Who would you like to send this to? *


Altmetric attention score

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed