The Effects of a Tax Notch on CEO Golden Parachute Contracts and Option Exercises

We show that CEO golden parachute contracts are responsive to a tax on golden parachutes, and CEO option exercises are responsive to these contracts. In particular, as a consequence of a tax code provision penalizing parachutes greater than 3 times taxable income, CEO parachute contracts frequently contain “cutback” provisions limiting the parachute to this threshold. When their companies are acquired, CEOs exercise options in bulk to raise their taxable income and boost their threshold. Identification comes from a difference-in-difference-in-difference exploiting a discontinuous change in exercise incentives over time and variation across CEOs in contract incentives and deal timing