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Golden Parachutes, Incentives, and the Cost of Debt

Author

Listed:
  • John Wald

    (University of Texas at San Antonio)

  • Sattar Mansi

    (Virginia Tech)

  • Anh Nguyen

    (Virginia Tech)

Abstract

We examine the relation between the presence of golden parachutes and the cost of debt financing. We hypothesize that since golden parachutes compensate CEOs in the event of termination, CEOs with golden parachutes will have an incentive to increase firm risk and decrease effort, and this will lead to a higher cost of debt. Consistent with these hypotheses, we document a significant positive relation between the use of golden parachutes and the cost of debt. We confirm these results with a natural experiment using a difference-in-difference specification based on a 2004 change in IRS tax regulations. Moreover, we find that the adoption of a golden parachute is associated with an increase in firm risk, a higher likelihood of CEO turnover, and a lower operating performance. Overall, the evidence suggests that golden parachutes are primarily negative for the firm and for debt holders in particular.

Suggested Citation

  • John Wald & Sattar Mansi & Anh Nguyen, 2012. "Golden Parachutes, Incentives, and the Cost of Debt," Working Papers 0008, College of Business, University of Texas at San Antonio.
    • Handle: RePEc:tsa:wpaper:0030fin
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    File URL: http://interim.business.utsa.edu/wps/fin/0008FIN-452-2012.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Golden parachutes; cost of debt; takeover probability; firm risk; CEO turnover;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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