A Safe Landing? Golden Parachutes and Corporate Behavior

The commonly stated motivation for golden parachutes (GP) was to provide managers the incentive to maximize shareholder wealth without concerns of job loss from change of control. But critics have argued that they create the incentive to run down a firm and make it a takeover target, especially in the case of poorly performing firms that require considerable turnaround effort. Such concerns led the US Congress to pass laws limiting the tax deductibility of GP payments and to levying additional taxes on such payments. Our study of a sample of 230 first-time GP-adopting firms during 1980-94 (and their preand post-adoption performance relative to a matched sample) indicates that such concerns are not warranted. Regardless of whether they are underor overperformers prior to adoption, there is no evidence that GP-adopters run down their firms: They do not put the firm up for sale any more often (in fact, they are less likely to be acquired post-adoption), CEO turnover does not increase, and operating, financial, and stock price performance post-adoption show no evidence of valuedestruction. In contrast, we find a dramatic increase in GP-adopters becoming acquirors. Combined with the additional evidence that their restructuring activity keeps pace with that of the non-adopters, we surmise that golden parachutes have probably given managers the confidence o restructure their firms without having to worry about losing their jobs from the firm being put in play.