Golden Parachute as a Compensation-Shifting Mechanism

Posted: 29 Feb 2008

See all articles by Albert H. Choi

Albert H. Choi

University of Michigan Law School; European Corporate Governance Institute (ECGI)

Multiple version iconThere are 3 versions of this paper

Date Written: April 2004

Abstract

We demonstrate how a golden parachute can be used to improve the target shareholders' net return by partially shifting the managerial compensation burden to the buyer through a higher acquisition price. Consistent with the empirical observations, we show that (1) the golden parachute will be contingent on a change-of-control rather than solely on the manager's layoff, (2) the golden parachute will be promised early, for example, at the time of the manager's employment, not just in the face of a takeover or a merger, (3) the shareholders would want to extend its coverage to other employees, and (4) the size of the parachute can be much larger than the manager's annual compensation. We also examine the effect of a golden parachute on the managerial incentive scheme.

Suggested Citation

Choi, Albert H., Golden Parachute as a Compensation-Shifting Mechanism (April 2004). The Journal of Law, Economics, and Organization, Vol. 20, Issue 1, pp. 170-191, 2004, Available at SSRN: https://ssrn.com/abstract=1095615 or http://dx.doi.org/10.1093/jleo/ewh028

Albert H. Choi (Contact Author)

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

HOME PAGE: http://www.law.umich.edu/FacultyBio/Pages/FacultyBio.aspx?FacID=alchoi

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://ecgi.global/users/albert-h-choi

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