Do parachutes discipline managers? An analysis of takeover battles

Oliver Fabel and Martin Kolmar

International Review of Law and Economics, 2012, vol. 32, issue 2, 224-232

Abstract: We analyze a Tullock-type takeover contest between two CEOs. To deter wasteful influence activities in shareholder optimum, the parachute compensates the (potentially) foregone earnings of the contestant whose incentives to invest in such activities are strongest. Therefore, the parachute is “golden”, but must be calculated net of all influence and separation costs. Notably, this solution arises in equilibrium with uncoordinated shareholder decisions. Further, equilibrium severance pay does not depend on structures or levels of pre-merger manager compensations. Shareholders are always indifferent between dismissing either of the two managers.

Keywords: Takeover battle; Contest model; Golden parachute (search for similar items in EconPapers)
JEL-codes: J41 K12 M12 M52 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:irlaec:v:32:y:2012:i:2:p:224-232

DOI: 10.1016/j.irle.2012.01.003

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