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| Author: | Subramaniam, C. |
| Title: | Are Golden Parachutes an Optimal Contracting Response or Evidence of Managerial Entrenchment? Evidence from Successful Takeovers |
| Journal: | Journal of Business Finance and Accounting
2001 : JAN-MAR, VOL. 28:1-2, p. 1-34 |
| Index terms: | CONTRACTS MERGERS MANAGERS |
| Language: | eng |
| Abstract: | Two models that attempt to explain the adoption of golden parachutes are examined. The first model views golden parachutes as an optimal contracting response to a takeover, the other perceives them as an outgrowth of severe managerial entrenchment that results in contracts for the benefit of managers. Using a sample of 169 successful acquisitions of NYSE targets from 1981 through 1989, the author documents that targets that have adopted golden parachutes experience significantly higher excess returns around the announcement of a takeover than targets without these contracts. The author finds similar increased excess returns for the bidder/target portfolios. The results are consistent with the managerial entrenchment hypothesis and inconsistent with the optimal contracting hypothesis. Sensitivity tests confirm these results. |
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