Classified Boards, the Cost of Debt, and Firm Performance
University of Baltimore
August 13, 2012
Journal of Banking and Finance, Forthcoming
This paper documents that classified boards substantially reduce the cost of debt. The evidence is not consistent with the argument that bondholders benefit from board classification because they are concerned about hostile takeovers. Instead, the results suggest that the lessened concern for takeovers associated with a classified board structure reduces managerial risk-taking, and increases managerial incentive for financial disclosure, with both effects inuring to bondholders’ benefit. Consistent with prior literature, classified boards on average are associated with a lower firm performance. However, under the circumstances that the agency conflict between shareholders and bondholders is severe, the performance effect of classified boards appears benign.
Number of Pages in PDF File: 61
Keywords: classified board, staggered boards, corporate governance, agency cost of debt, firm performance, antitakeover, risk-taking, disclosure, transparency
JEL Classification: G30, G34Accepted Paper Series
Date posted: December 23, 2010 ; Last revised: August 14, 2012
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