Takeover Immunity, Takeovers and the Market for Non-Executive Directors

Abstract:     
Using a database that covers close to 3,000 listed companies in the United States during a ten year period from 1994 to 2003, we characterize non-executive directors' preference for ATP levels; examine the effect on their careers for changes in ATP levels and approval of acquisitions that create or destroy value. We develop and test two competing hypotheses that relate market for non-executive directors to the level of external monitoring mechanism of the firms they serve. "Reward for Discretion Hypothesis" would predict that directors are valued more when they display discretion with regard to their choice of ATP levels rather than following a rule. On the other hand, "CEO Risk Aversion Hypothesis" would predict that CEOs seek directors with high ATP inclination and who also display uniformity in their choice of ATP levels. Our results suggest that non-executive directors serving in high ATP firms experience greater turnover in board seats. High ATP preference directors with no variation in their choice of ATP level are more likely to lose board seats, whereas high ATP preference directors with variation in their choice of ATP levels obtain additional board seats more often. Therefore, with regard to choice of ATP levels, "Reward for Discretion Hypothesis" dominates. The results with changes in ATP level as well as for M&A deals also support the "Reward for Discretion" hypothesis. The labor market appears to prefer directors who show variation in ATP level choices rather than simply prefer a high or low ATP level.

Number of Pages in PDF File: 55

Keywords: non-executive directors, anti-takeover provisions, corporate governance, mergers and acquisitions

JEL Classification: G30, G34

working papers series