Golden Parachutes, Poison Pills, And Synergies From Raids

Atreya Chakraborty () and Abdikarim M. Farah
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Abdikarim M. Farah: Department of Economics Boston College

No 216, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: We develop a model where adopting anti-takeover measures and awarding golden parachutes may be attractive for the shareholders ex ante although ex post their adoption maybe value reducing. The acquisition process is viewed as symmetric information Nash bargaining game (between the target and the raiding shareholders), with parties bargaining over stochastic synergy gains through a tender offer. We show that, contrary to recent proposals, the shareholders are unequivocally better off with golden parachutes than takeover-contingent stocks if managers are risk adverse. Finally we show that the size of the golden parachute is proportional to the riskiness of the firm.

Date: 1993-12
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