On the importance of golden parachutes

In acquisitions, target chief executive officers (CEOs) face a moral hazard: Any personal gain from the deal could be offset by the loss of the future compensation stream associated with their jobs. Larger, more important parachutes provide greater relief for these losses. To explicitly measure the moral hazard target CEOs face, we standardize the parachute payment by the expected value of their acquisition-induced lost compensation. We examine 851 acquisitions from 1999–2007, finding that more important parachutes benefit target shareholders through higher completion probabilities. Conversely, as parachute importance increases, target shareholders receive lower takeover premia, while acquirer shareholders capture additional rents from target shareholders

Relative equity market valuation conditions and acquirers’ gains

We examine whether the relative equity market valuation conditions (EMVCs) in the merging firms countries help acquirers’ managers to time the announcements of domestic and foreign target acquisitions. After controlling for several deal- and merging firms-specific features we find that acquisition activity, as well as acquirers gains, are significantly higher during periods of high-EMVCs at home, irrespective of the domicile of the target. We also find that the higher foreign acquirers’ gains that reaped during periods of high-EMVCs at home are realized by deals of targets based in the RoW (=World-G7), rather than G6 (=G7-UK) countries, which is due to the low correlation of EMVCs between the U.K. (home) and the RoW countries. Moreover, acquisition of targets domiciled in the RoW (G6) countries yield higher (lower) gains than domestic targets during periods of high-EMVCs at home. This suggests that the relative EMVCs between the merging firms’ countries allow acquirers’ managers to time the market and acquire targets at a discount, particularly in countries in which acquirers’ stocks are likely to be more overvalued than the targets’ stocks