Golden Parachutes: Incentive Aligners, Management Entrenchers, or Takeover Bid Signals?

Abstract

In this paper we investigate the effect of golden parachute (GP) adoptions on shareholder wealth. We control for the potential effect a GP adoption has on the probability that a firm will receive a takeover bid by investigating the wealth effects for firms that are in play when the GP is adopted. We find that announcements are wealth neutral when firms are in play and wealth increasing when firms are not in play when a GP is adopted. The results suggest that GPs have no influence on the success of a tender offer, refuting the hypotheses that they either align manager and shareholder interests or that they entrench inefficient managers. The difference in the results for in-play and not-in-play firms is consistent with the hypothesis that GPs signal an increased likelihood that a firm will receive a takeover bid.

Golden Parachutes and the Wealth of Shareholders

“…We find that GPs are associated with higher expected acquisition premiums; even though GPs 1 Earlier studies examining the relationship of GPs with acquisition likelihood include Harris (1990); Machlin, Choe, and Miles (1993); Cotter and Zenner (1994); Born and Trahan (1993); Hall and Anderson (1997); Agrawal and Knoeber (1998); Lefanowicz, Robinson, and Smith (2000); and Bates, Becher, and Lemmon (2008). Most (but not all) of these studies find a positive association between GPs and acquisition likelihood.…”

Free Cash Flow, Golden Parachutes, and the Discipline of Takeover Activity

“…Machlin, Choe and Miles (1993) find support for both conjectures. Born, Trahan and Faria (1993) find support for the increased bid and no support for increased takeover, and Hall and Anderson (1997) find no support for either hypothesis. Since our sample consists of successful takeovers we do not explicitly test Jensen's conjectures.…”

“…Moreover, new adoptions of golden parachutes virtually ceased when the FDIC guarantee was withdrawn (Evans, Noe and Thornton, 1997). 5 Prior research primarily tend to use stock return data to (1) determine if golden parachutes are beneficial to stockholders by aligning the incentives of managers or are deleterious to the shareholders under the Management entrenchment theory (Lambert and Larcker, 1985;Born, Trahan and Faria, 1993;Mogavero and Toyne, 1995;and Hall and Anderson, 1997), and (2) to test for the effect of golden parachutes on takeover activity (Machlin, Choe, and Miles, 1993;Born, Trahan and Faria, 1993;and Hall and Anderson, 1997). 6 Using the median net capital expenditures as the dependent variable and the median of the individual year market-to-book ratio for the independent variable does not affect the qualitative results.…”

Are Golden Parachutes an Optimal Contracting Response or Evidence of Managerial Entrenchment?: Evidence from Successful Takeovers

“…For a review of this literature see Jarrel, Brickley and Netter (1988). 2 For example, see Subramaniam and Daley (2000), Hall and Anderson (1997), Shemanske and Khan (1995), Born, Trahan and Faria (1993), Sinha (1992), Berkovitch and Khanna (1991), Wade, O'Reilly and Chandratat (1990), Harris (1990), Singh and Harrianto (1989), Cochran, Wood and Jones (1985) and Lambert and Larcker (1985). 3 While it has long been common in the US mergers and acquisition scene Raghavan and Sims (2000) report that GPs for top management of targets has recently emerged in a number of European takeovers.…”