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Are Golden Parachutes an Optimal Contracting Response or Evidence of Managerial Entrenchment?: Evidence from Successful Takeovers
Author(s) -
Subramaniam Chandra
Publication year - 2001
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00364
Subject(s) - sample (material) , economics , large sample , tender offer , alternative hypothesis , monetary economics , business , financial economics , econometrics , finance , mathematics , corporate governance , statistics , shareholder , chemistry , chromatography , null hypothesis
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, I document that targets that have adopted golden parachutes experience significantly higher excess returns around the announcement of a takeover than targets without these contracts. I find similar increased excess returns for the bidder/target portfolios. In addition, bidder excess return is independent of the existence of golden parachutes in targets. Additional results suggest that golden parachutes do not reduce managerial resistance to takeovers. The results are consistent with the managerial entrenchment hypothesis and inconsistent with the optimal contracting hypothesis. Sensitivity tests confirm these results.