Golden parachutes “can be expected to affect premiums by lowering the premium threshold above which an acquisition would be in executives’ private interests,” the authors write. “In addition, some lower-premium transactions that would not be in the interest of executives in the absence of a [golden-parachute policy] might become worthwhile” once such a policy is introduced.
But shareholders still benefit from the deals, the authors note, because the lower acquisition premiums are offset by the fact that these firms are more likely to be sold in the first place.
Investors may not be as pleased, however, by the relationship between golden parachutes and overall firm value. The authors found that in the two to three years between publication of IRRC reports, the implementation of a golden-parachute policy led to an average decrease of about 4.5 percent in a company’s Tobin’s Q ratio.
They found a similar effect when comparing stock returns. The stock of companies that adopted golden parachutes underperformed the stock of non-parachute firms by about 4.35 percent annually during the period around adoption and several years following adoption. “Results on the stock returns of long-term adopters versus long-term non-adopters suggest that firm performance tends to deteriorate in the presence of a [golden parachute],” the authors write, inferring that they “provide corporate executives disincentives to manage the firm efficiently.”
“This pattern does not provide support for theoretical predictions that [golden parachutes] improve performance by encouraging long-term planning and investments in firm-specific human capital,” the authors conclude. “Instead, our findings are consistent with the possibility that, by reducing the disciplinary force of the market for corporate control, [golden parachutes] lead to increased managerial slack.”
Companies that use golden parachutes to reward their ousted executives in the event of a takeover are targeted and acquired more often, and their shareholders benefit from those buyouts. But these firms also have lower value and subpar stock returns, on average, before adopting the parachutes, and they tend to continue to underperform with the parachutes.