FIN-04-020 |
NYU Stern School of Business |
September 2004
David Yermack
ABSTRACT
This paper studies separation payments made when CEOs leave their firms. In my sample of
Fortune 500 companies these packages are widespread and lucrative. Almost 80 percent of
CEOs receive separation pay, and its mean present value exceeds $4.5 million. Severance is
positively associated with future pay that CEOs might expect until age 65, and is higher when
CEOs depart involuntarily. Shareholders react negatively when separation agreements are
disclosed, but only in cases of voluntary CEO turnover. Some evidence suggests that severance
pay acts as a bonding device between the board and CEO, while other evidence accords with
theories of rent extraction.
David Yermack
Institution: Stern School of Business, New York University
Email: dyermack@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~dyermack
Telephone: (212) 998-0357
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