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Do parachutes discipline managers? An analysis of takeover battles

  • Fabel, Oliver
  • Kolmar, Martin

We analyze a Tullock-type takeover contest between two CEOs. To deter wasteful influence activities in shareholder optimum, the parachute compensates the (potentially) foregone earnings of the contestant whose incentives to invest in such activities are strongest. Therefore, the parachute is “golden”, but must be calculated net of all influence and separation costs. Notably, this solution arises in equilibrium with uncoordinated shareholder decisions. Further, equilibrium severance pay does not depend on structures or levels of pre-merger manager compensations. Shareholders are always indifferent between dismissing either of the two managers.

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Article provided by Elsevier in its journal International Review of Law and Economics.

Volume (Year): 32 (2012)
Issue (Month): 2 ()
Pages: 224-232

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Handle: RePEc:eee:irlaec:v:32:y:2012:i:2:p:224-232
Contact details of provider: Web page: http://www.elsevier.com/locate/irle

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