The Impact of Golden Parachutes on Fortune 500 Stock Returns: A Reexamination of the Evidence

By Mogavero, Damian J.; Toyne, Michael F. | Quarterly Journal of Business and Economics, Autumn 1995 | Go to article overview

The Impact of Golden Parachutes on Fortune 500 Stock Returns: A Reexamination of the Evidence


Mogavero, Damian J., Toyne, Michael F., Quarterly Journal of Business and Economics


INTRODUCTION

Golden parachutes provide executives with a form of compensation insurance in the event they are terminated following a change of corporate control. While golden parachutes alone have only a minor economic impact on potential takeovers, they represent (and often are accompanied by) a class of takeover defense mechanisms that potentially undermine the fundamental responsibility of executives and boards to represent the best interests of stockholders. During the merger wave that began in the early 1980s golden parachutes became increasingly controversial when terminated executives began to receive what often were regarded as unduly large payouts.

Because golden parachutes normally are provided to executives by boards without stockholder approval, their adoption sends a signal concerning the relationship between executives and boards. Corporate proxy statements often include stockholder proposals designed to prohibit golden parachutes. Boards usually respond by recommending that stockholders vote against such proposals because they severely restrict the firm's ability to attract high quality executives. The proxy voting process usually supports boards. True stockholder sentiment can be found, however, in stock returns associated with the announcement of golden parachute adoption.

Lambert and Larcker (1985) conclude that from 1975 through 1982 golden parachute adoptions were associated with positive returns to stockholders. Their evidence is consistent with a hypothesis that golden parachutes improve stock values by reducing conflicts of interest between executives and stockholders during a takeover. Subsequently, the Lambert and Larcker (1985) study often has been used by corporate boards as a rationale for golden parachute adoptions. Born, Faria, and Trahan (1993) provide evidence, however, that the positive returns observed by Lambert and Larcker (1985) may have been affected by investor perception of golden parachute adoptions as signals of pending takeovers. Thus, questions concerning investor sentiment toward golden parachutes remain unresolved.

Our study examines returns to stockholders in a sample of Fortune 500 firms that adopted golden parachutes during the period 1982 through 1990. We explore the possibility that during this time period the motivation for adopting golden parachutes and the subsequent stock returns associated with adoptions changed. Our study period encompasses the rise in takeover activity during the early 1980s and the decline in takeover activity during the late 1980s. Our study period also includes the initiation of several legislative changes designed to regulate golden parachutes. Among these changes is the Deficit Reduction Act of 1984 which denies corporate tax deductions for excessive golden parachute payouts.(1)

The increase in attempts to place restrictions on golden parachutes coincided with an escalation in golden parachute adoptions throughout the second half of the 1980s. Thus, the primary motivation for recent adoptions may be avoidance of future restrictions. If this notion is valid, recent golden parachute adoptions are more likely to signal information concerning executive influence with boards rather than information concerning executive incentives during takeovers. Our evidence is consistent with this notion. We find that stock returns associated with golden parachute adoptions changed from positive to negative during the 1980s.

COMPETING HYPOTHESES OF GOLDEN PARACHUTE ADOPTION

Prior studies have shown that target firm stockholders earn substantial profits when theft firms are acquired (Jarrell, Brickley, and Netter, 1988). Changes in corporate control, however, can cause hardships for terminated executives through loss of wages while they seek new employment, possible reductions in pay levels when new employment is found, and loss of nonpecuniary benefits (Lambert and Larcker, 1985). Advocates of golden parachutes argue that pre-arranged severance agreements reduce conflicts of interest between executives and stockholders during takeovers (i. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Impact of Golden Parachutes on Fortune 500 Stock Returns: A Reexamination of the Evidence
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.