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Free Cash Flow, Golden Parachutes, and the Discipline of Takeover Activity

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  • Chandra Subramaniam
  • Lane A. Daley

Abstract

We conjecture that golden parachutes are initiated when the agency cost of free cash flow is most severe. We examine the relation between golden parachutes and investment levels in firms that have been successfully acquired. Our results support these three conclusions. First, target firms overinvest prior to an acquisition when golden parachutes are present. Second, the acquirers of targets with golden parachutes reduce investment subsequent to the takeover. Third, the reversal in capital investment by the combined firm is correlated with the magnitude of the target’s pre‐acquisition overinvestment. The latter findings indicate the takeover acts as a disciplining mechanism with the acquirer reversing the target overinvestment subsequent to the acquisition

Suggested Citation

  • Chandra Subramaniam & Lane A. Daley, 2000. "Free Cash Flow, Golden Parachutes, and the Discipline of Takeover Activity," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(1‐2), pages 1-36, January.
    • Handle: RePEc:bla:jbfnac:v:27:y:2000:i:1-2:p:1-36
    DOI: 10.1111/1468-5957.00304
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    Cited by:

    1. Elijah Brewer & William E. Jackson & Larry D. Wall, 2006. "When target CEOs contract with acquirers: evidence from bank mergers and acquisitions," FRB Atlanta Working Paper 2006-28, Federal Reserve Bank of Atlanta.

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