Golden parachutes: as their importance to CEOs increases, shareholders lose out in takeovers

A 10 per cent increase in the importance of the parachute relative to the merger pay package is linked to a five per cent fall in acquisition premium

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According to a new study of par Cass Business School[1] (London) et LeBow College of Business[2](Philadelphia), CEOs eager to receive so-called ’golden parachutes’ have been found to settle for lower acquisition premiums, costing shareholders millions of pounds. The study have found that these greedy CEOs are typically selling their firms $249million (£158m) below value

The study, carried out by Dr Anh Tran from Cass Business School, which is part of City University London, and Professors Eliezer Fich and Ralph Walkling from the LeBow College of Business at Drexel University in Philadelphia[3], looked at more than 850 acquisitions announced in the US between 1999 and 2007.

The authors examined the relative importance of golden parachutes to CEOs when all other parts of their merger pay package, including potential loss of earnings, were taken into account. The findings showed that a 10 per cent increase in the importance of the parachute relative to the merger pay package was linked to a five per cent fall in acquisition premium - amounting to a shortfall of $249million in deal value for the average takeover.

Dr Tran said the results indicate that larger parachutes encourage some executives to compromise the interests of shareholders. "Our results show that as CEOs become more insulated from personal losses due to relatively larger parachutes, shareholders obtain less favourable acquisition terms. This suggests that overly important parachutes encourage some self-serving CEOs to sacrifice premium for personal gain," he said.

Golden parachutes have come under recent attack in the UK after business secretary, Vince Cable, condemned directors who “forget their wider duties when a fat cheque is waved before them”. He promised to review the way pay incentives for top managers are drawn up. In the US, the Obama administration has also imposed limits on parachute payments to rein in executive compensation at companies bailed out by the government.

Dr Tran added: "When a firm becomes a takeover target, CEOs are faced with a moral hazard. They have direct influence over actions that could provide personal benefit at the possible expense of shareholders. Because of this, it is the relative importance of parachutes to CEOs, not their mere presence, which is important".

"If a golden parachute protects CEOs from a severe loss of personal wealth during a takeover, they behave differently than if they were fully exposed to the loss. A trivial parachute relative to a large loss in future earnings is unlikely to motivate an executive to consent to a takeover of their firm. However, an overly generous parachute relative to their full pay package could induce a rush to sell, regardless of the acquisition price being offered."

Next Finance March 2011

Article also available in : English EN | français FR


[1] Cass Business School
Cass Business School, which is part of City University London, delivers innovative, relevant and forward-looking education, training, consultancy and research. Located in the heart of one of the world’s leading financial centres, Cass is the business school for the City of London. Cass MBA, specialist Masters and undergraduate degrees have a global reputation for excellence, and the School supports nearly 100 PhD students. Cass offers the widest portfolio of specialist Masters programmes in Europe and our Executive MBA is ranked tenth in the world by the Financial Times. Cass has the largest faculties of Finance and Actuarial Science and Insurance in Europe. It is ranked in the top 10 UK business schools for business, management and finance research and 90% of the research output is internationally significant. Cass is a place where students, academics, industry experts, business leaders and policy makers can enrich each other’s thinking. For further information visit:

[2] LeBow College of Business
Drexel University’s LeBow College is a comprehensive business school with nationally ranked MBA programs that emphasize experiential insight and innovative thinking. LeBow’s interdisciplinary curricula are accredited by AACSB International - The Association to Advance Collegiate Schools of Business – placing LeBow among the elite 20 percent of business schools to have earned this distinction. LeBow has been recognized by BusinessWeek, Financial Times, Entrepreneur magazine and The Princeton Review as one of the world’s top business schools. For more information, visit

[3] Professor Ralph Walkling, a co-author of this study, is executive director of the Center for Corporate Governance at LeBow College. Professor Eli Fich, also a co-author, is a fellow of the Center. The Center for Corporate Governance is at the forefront in the thorough examination of governance issues facing the business community, and it is recognized as a premier research center of effective and responsible management. Center fellows research topics that advance knowledge in the fields of finance, marketing, accounting, organizational behavior and other areas related to business.




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