Golden Parachutes and the Wealth of Shareholders

Abstract

Golden parachutes (GPs) have attracted substantial attention from investors and public officials for more than two decades. We find that GPs are associated with higher expected acquisition premiums and that this association is at least partly due to the effect of GPs on executive incentives. However, we also find that firms that adopt GPs experience negative abnormal stock returns both during and subsequent to the period surrounding their adoption. This finding raises the possibility that even though GPs facilitate some value-increasing acquisitions, they do have, on average, an overall negative effect on shareholder wealth; this effect could be due to GPs weakening the force of the market for control and thereby increasing managerial slack, and/or to GPs making it attractive for executives to go along with some value-decreasing acquisitions that do not serve shareholders' long-term interests. Our findings have significant implications for ongoing debates on GPs and suggest the need for additional work identifying the types of GPs that drive the identified correlation between GPs and reduced shareholder value.

Tipping Point

“…Haynes and colleagues (Haynes et al, 2014;Haynes et al, 2015) further explore the links between self-interest and greed in specific corporate and entrepreneurial settings. Specifically, by building on work by Bebchuk and colleagues (Bebchuk, Cohen, & Wang, 2010;Bebchuk, Grinstein, & Peyer, 2010), Haynes and her coauthors propose that greed is an extreme form of selfinterest. In aggregate, these research findings indicate that self-interest is indeed a variable, rather than a universal and constant factor.…”

On the Importance of Golden Parachutes

“…However, studies examining the association between parachutes and the premia paid for target firms provide mixed evidence. For example, Cotter and Zenner (1994), Bange and Mazzeo (2004), and Lefanowicz, Robinson, and Smith (2000) find no association while Bebchuk, Cohen and Wang (2010) report an inverse association. Hartzell, Ofek, and Yermack (2004) examine situations in which the value of the parachute to the target CEO is augmented prior to deal completion.…”

Payments to Executives of Target Firms in Mergers: Tests Using Newly-Available Data

“…In their seminal paper, Lambert and Larcker (1985) report that adoptions of golden parachutes are associated with positive stock price reactions, although it is not clear if this increase is due to a higher probability of takeover or a higher expected takeover premium. The broad conclusion that golden parachutes are associated with better outcomes for shareholders (either at adoption or in takeover contests) is also (largely) supported by Bebchuk, Cohen, and Wang (2010) and Fich, Tran, and Walkling (2011). However, numerous other papers, such as Cotter and Zenner (1994), Lefanowicz, Robinson, and Smith (2000), and Bange and Mazzeo (2004), find no association between golden parachutes and shareholder outcomes.…”