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Golden parachutes: Credible commitments or evidence of shirking?

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  • Dino Falaschetti
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    Abstract

    External agents are frequently characterized as necessary for efficiency in team production settings. At the same time, these agents must be constrained from opportunistically exercising their enforcement capabilities. I argue that collective action costs and formal institutions (e.g., golden parachute agreements) can act as substitute factors in producing this constraint. The incidence of golden parachutes in a sample of S&P 500 firms is consistent with this conjecture: golden parachutes are more likely in firms with concentrated ownership. Interpreted in this light, golden parachutes enhance efficiency by increasing the credibility with which owners can commit against opportunism.

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    File URL: http://128.118.178.162/eps/mic/papers/0311/0311004.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series Microeconomics with number 0311004.

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    Length: 20 pages
    Date of creation: 16 Nov 2003
    Date of revision:
    Handle: RePEc:wpa:wuwpmi:0311004

    Note: Type of Document - pdf; prepared on WinXP; pages: 20
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    Web page: http://128.118.178.162

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    Keywords: Credible commitment; Ownership structure;

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    1. Schwartz, Steven, 1982. "Factors Affecting the Probability of Being Acquired: Evidence for the United States," Economic Journal, Royal Economic Society, vol. 92(366), pages 391-98, June.
    2. Anup Agrawal & Charles R. Knoeber, . "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers 8-96, Wharton School Rodney L. White Center for Financial Research.
    3. Alan J. Auerbach, 1988. "Corporate Takeovers: Causes and Consequences," NBER Books, National Bureau of Economic Research, Inc, number auer88-1.
    4. Andrei Shleifer & Lawrence H. Summers, 1989. "Breach of Trust in Hostile Takeovers," NBER Working Papers 2342, National Bureau of Economic Research, Inc.
    5. Peter Kennedy, 2003. "A Guide to Econometrics, 5th Edition," MIT Press Books, The MIT Press, edition 5, volume 1, number 026261183x, January.
    6. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1155-77, December.
    7. Agrawal, Anup & Knoeber, Charles R., 1996. "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(03), pages 377-397, September.
    8. Holmstrom, Bengt, 1999. "The Firm as a Subeconomy," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(1), pages 74-102, April.
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