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Golden Parachute as a Compensation-Shifting Mechanism

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  • Albert Choi

Abstract

We demonstrate how a golden parachute can be used to improve the target shareholders' net return by partially shifting the managerial compensation burden to the buyer through a higher acquisition price. Consistent with the empirical observations, we show that (1) the golden parachute will be contingent on a change-of-control rather than solely on the manager's layoff, (2) the golden parachute will be promised early, for example, at the time of the manager's employment, not just in the face of a takeover or a merger, (3) the shareholders would want to extend its coverage to other employees, and (4) the size of the parachute can be much larger than the manager's annual compensation. We also examine the effect of a golden parachute on the managerial incentive scheme. Copyright 2004, Oxford University Press.

Suggested Citation

  • Albert Choi, 2004. "Golden Parachute as a Compensation-Shifting Mechanism," Journal of Law, Economics, and Organization, Oxford University Press, vol. 20(1), pages 170-191, April.
  • Handle: RePEc:oup:jleorg:v:20:y:2004:i:1:p:170-191
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    Cited by:

    1. Claudia M. Landeo & Kathryn E. Spier, 2016. "Stipulated Damages as a Rent-Extraction Mechanism: Experimental Evidence," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 172(2), pages 235-273, June.
    2. Mujumdar, Sudesh & Pal, Debashis, 2007. "Strategic managerial incentives in a two-period Cournot duopoly," Games and Economic Behavior, Elsevier, vol. 58(2), pages 338-353, February.
    3. repec:bla:stratm:v:38:y:2017:i:7:p:1499-1517 is not listed on IDEAS
    4. Szymon Okoń, 2012. "New Approach to Remuneration Policy for Investment Firms: a Polish Capital Market Perspective," Contemporary Economics, University of Finance and Management in Warsaw, vol. 6(1), March.
    5. repec:eee:riibaf:v:42:y:2017:i:c:p:992-1004 is not listed on IDEAS
    6. Albert H. Choi, 2009. "A RENT EXTRACTION THEORY OF RIGHT OF FIRST REFUSAL -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 57(2), pages 252-262, June.

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