Golden Parachutes, Incentives, and the Cost of Debt

John Wald, Sattar Mansi and Anh Nguyen
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John Wald: University of Texas at San Antonio
Anh Nguyen: Virginia Tech

No 8, Working Papers from College of Business, University of Texas at San Antonio

Abstract: We examine the relation between the presence of golden parachutes and the cost of debt financing. We hypothesize that since golden parachutes compensate CEOs in the event of termination, CEOs with golden parachutes will have an incentive to increase firm risk and decrease effort, and this will lead to a higher cost of debt. Consistent with these hypotheses, we document a significant positive relation between the use of golden parachutes and the cost of debt. We confirm these results with a natural experiment using a difference-in-difference specification based on a 2004 change in IRS tax regulations. Moreover, we find that the adoption of a golden parachute is associated with an increase in firm risk, a higher likelihood of CEO turnover, and a lower operating performance. Overall, the evidence suggests that golden parachutes are primarily negative for the firm and for debt holders in particular.

Keywords: Golden parachutes; cost of debt; takeover probability; firm risk; CEO turnover (search for similar items in EconPapers)
JEL-codes: G32 G34 G38 K22 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2012-03-19
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Citations: View citations in EconPapers (1)

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