Too Many Mergers? The Golden Parachute as a Driver of M&A Activity in the 21st Century

This paper argues that the prevailing corporate governance regime in the United States has produced a level of mergers and acquisition activity that is greater than the social optimum. In the late 19th through the 20th century M&A activity was characterized by “waves” that reflected adaptations to changing external environment, whether the efficient production frontier, regulatory constraints, or capital market developments. Economically motivated partiessaw the opportunities in changing the boundaries of the firm; successful first-movers spawned imitators, hence a wave, which eventually subsided, often alongside deteriorating capital market conditions. The 21st century is different. There is a persistently high level of M&A. Yes, there are fluctuations but not “waves.” This pattern can be explained at least in part by the introduction of an internal driver of M&A activity, the “golden parachute,” a super-bonus payoff to a target CEO. Golden parachutes were introduced as a corporate governance innovation in the 1980s to overcome managerial hostility to an unsolicited premium bid. Over time, especially as executive compensation radically shifted toward stock-based pay, golden parachutes have become increasingly lucrative. They now provide a CEO with a high-powered incentive to become a target CEO, compensating the CEO like a deal-hunting investment banker, and thus have changed the pattern of M&A activity. This results in efficiency losses at the firm level, produces social losses because of excessive layoffs, and because of the resultant “inequality with privity,” will exacerbate social resentments that may have political consequences.