Golden Parachutes and the Wealth of Shareholders

Abstract

Golden parachutes have attracted much debate and substantial attention from investors and public officials for more than two decades, and the Dodd-Frank Act mandated a shareholder vote on any future adoption of a golden parachute by public firms. We analyze the relationship that golden parachutes have with expected acquisition premia and with firm value. Integrating into our analysis both the effects on acquisition likelihood and on premia conditional on an acquisition, we find that golden parachutes are associated with higher expected acquisition premia, and that this association is at least partly due to the effect of golden parachutes on incentives. We also find that firms that adopt a golden parachute experience a reduction in their industry-adjusted Tobin’s Q, as well as negative abnormal stock returns both during the inter-volume period of adoption and subsequently.

Keywords: Golden Parachute, Executive Compensation, Corporate Governance, Acquisitions, Takeovers, Acquisition Likelihood, Acquisition Premiums, Agency Costs, Tobin’s Q, Dodd-Frank

JEL Classification: D23, G32, G38, J33, J44, K22, M14