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Abstract
Golden parachutes have attracted substantial attention from investors and public officials for more than two decades. We find that golden parachutes are associated with higher expected acquisition premiums, and that this association is at least partly due to the effect of golden parachutes on executive incentives. However, we find that firms that adopt a golden parachute experience a reduction in their industry-adjusted Tobin’s Q, as well as negative abnormal stock returns both during and subsequent to the inter-volume period of adoption. This finding raises the possibility that, despite their facilitating some value-increasing acquisitions, golden parachutes have, on average, an overall negative effect on shareholder wealth; this effect could be due to GPs weakening the force of the market for control and thereby increasing managerial slack and/or providing executives with incentives to go along also with some value-decreasing acquisitions that do not serve shareholders’ long-term interests. Our findings have significant implications for ongoing debates on golden parachutes and suggest the need for additional work identifying the type of GPs that drive the correlation between GPs and reduced shareholder value.