Golden Parachutes: Incentive Aligners,Management Entrenchers,or Takeover Bid Signals?

In this paper we investigate the effect of golden parachute (GP) adoptions on shareholder wealth. We control for the potential effect a GP adoption has on the probability that a firm will receive a takeover bid by investigating the wealth effects for firms that are in play when the GP is adopted. We find that announcements are wealth neutral when firms are in play and wealth increasing when firms are not in play when a GP is adopted. The results suggest that GPs have no influence on the success of a tender offer, refuting the hypotheses that they either align manager and shareholder interests or that they entrench inefficient managers. The difference in the results for in-play and not-in-play firms is consistent with the hypothesis that GPs signal an increased likelihood that a firm will receive a takeover bid.