The loss of jobs for many of target’s top management sometimes compels the managers to reject...

The loss of jobs for many of target’s top management sometimes compels the managers to reject an offer that might be in the interest of the firm’s shareholders. Discuss how golden parachutes arrangements assist in overcoming this agency problem. Can golden parachutes provisions themselves also create agency problems for the firm?

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Expert Solution

Acquisition of a firm at a higher price by the acquirers can lead to shareholders wealth maximization and is in the best interest of shareholders. Sometimes, managers execute several anti - takeover mechanism to defend themselves from being acquired as it can led to loss of jobs for them , this harms the shareholders and leads to agency problems between the shareholders and management.

Golden parachute strategy : this strategy is an agreement between the employees and the management of the target company. The employees specify that in case there is any loss of jobs for them in the merger agreement then the management will compensate them accordingly. So, if this strategy is implemented , the mangers are provided a safety net and not left in the mercy of their acquirers.If the acquirer accepts the deal, then it can solve agency problems.

However, implementation of the golden parachute can lead to potential loss for the acquiring firm. It can make the deal expensive and can discourage the company taking over , from making the move. So, yes this anti takeover mechanism if implemented to protect themselves from the takeover can lead to agency problems for the firm as this is implemented without the shareholder approval.

jeff jeffy answered 10 months ago

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