Article Title
Golden Parachutes, Severance, and Firm Value
Abstract
Golden parachutes (GPs) are now standard contract provisions for public company CEOs. While they have become ubiquitous, they have also been severely criticized for harming shareholder value. As a result, GPs are subjected to intense shareholder activism and are uniquely penalized under both tax and securities law. Recent empirical work suggests that they may indeed be associated with poor firm performance, validating the steps taken to reduce or eliminate GPs.
This Article offers reasons to rethink the consensus that has developed around GPs. First, this Article highlights a substantial endogeneity problem, which earlier studies linking GPs and firm values fail to fully answer. Second, this Article’s novel empirical analysis suggests that the earlier evidence linking GPs with lower firm values is not robust to the use of more recent data and may have been driven by the omission of complete data regarding regular severance promises. It may be that regular severance promises, rather than GPs, drive poor performance and that past results to the contrary are likely based on incomplete data in prior periods. These findings comport with a set of relatively uncontroversial arguments for severance’s dominance over GPs when it comes to shaping CEO incentives. Taken together, these findings suggest that law and market participants ought not to necessarily view GPs as uniquely problematic.