The Effect of Golden Parachutes

Bachelor Thesis

International Bachelor Economics & Business Economics (IBEB)

The Effect of Golden Parachutes on Recent Mergers

and Acquisitions in the United States.

ERASMUS UNIVERSITY ROTTERDAM

Erasmus School of Economics

Department of Finance

Supervisor: dr. S. Gryglewicz

Student: Jurriaan van den Hoven

Student Number: 311383

Contact Information: 311383jh@eur.nl

Submitted on: 13-09-2011

Abstract:

This study presents a theoretical and an empirical analysis of the relationship

between ‘Golden Parachutes’ and the “successfulness” of recent mergers and

acquisitions in the United States. The theoretical part of this paper examines the two

major hypotheses on the existence and effects of Golden Parachutes as laid down in

papers covering different periods in time. From the different conclusions, along with

the economic environment nowadays, it tries to conclude which relationship presently

exists. The empirical part of this paper focuses on 82 US firms which possess a

golden parachute and 54 US firms without golden parachute agreements which are

taken over in the period from the first of January in 2005 till the first of January in

2010. The empirical analysis does not support either of the two most common

hypotheses on this subject, as it does not find a significant difference between the

means of both groups, nor any significant relationship between the average amount

of golden parachute and the acquisition premium paid by the acquirer. Nor does a

hybrid form of both hypotheses exist.

Keywords: Golden Parachute, Mergers and Acquisitions, Acquisition Premium,

Executive Compensation.

Table of Contents

Abstract page i

1. Introduction page 1

2. Literature Review

2.1 The Incentive Alignment Hypothesis page 5

2.2 The Wealth Transfer Hypothesis page 6

2.3 The Hybrid Hypothesis page 6

2.4 Other Reasons for Golden Parachutes page 7

3. Empirical Study

3.1 Methodology page 8

3.2 Description of the Sample and the page 9

Control Group

3.3...