For The Many of The Few?

Abstract

Recent studies [Bebchuk and Fried (2002)] have shown that managerial power and negotiations play important roles in the design of executive pay arrangements, suggesting that some CEOs may extract greater economic rent from shareholders when provided with the opportunity. This paper seeks to explore CEOs rent-extracting behaviors by examining golden parachute lump sum payments received by target CEOs and other extraordinary gains they negotiated during M&As. These payments are significantly affected by the CEO's characteristics, firm size and whether the CEO is retained but appears to be unrelated to measures of performance. I find that retained CEOs are more likely to negotiate for additional gains but their success rates are dependent on the positions they occupy in the combined company. My analysis also provides evidence that all these extraordinary benefits (negotiated gains and post-acquisition positions) come at the expense of shareholders, highlighting an agency problem where CEOs trade shareholders value in return for their own personal benefits.