Do parachutes discipline managers? An analysis of takeover battles
Journal
International Review of Law and Economics
ISSN
0144-8188
ISSN-Digital
1873-6394
Type
journal article
Date Issued
2012-06
Author(s)
Abstract
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.
Language
English
Keywords
Takeover battle
Contest model
Golden parachute
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Elsevier
Publisher place
Amsterdam
Volume
32
Number
2
Start page
224
End page
232
Pages
9
Subject(s)
Division(s)
Eprints ID
223616