The Costs of Entrenched Boards

37 Pages Posted: 8 Dec 2003 Last revised: 23 May 2019

See all articles by Lucian A. Bebchuk

Lucian A. Bebchuk

Harvard Law School; European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Alma Cohen

Harvard Law School; Tel Aviv University - Eitan Berglas School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

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Abstract

This paper investigates empirically how the value of publicly traded firms is affected by arrangements that protect management from removal. Staggered boards, which a majority of U.S. public companies have, substantially insulate boards from removal in either a hostile takeover or a proxy contest. We find that staggered boards are associated with an economically meaningful reduction in firm value (as measured by Tobin's Q). We also provide suggestive evidence that staggered boards bring about, and not merely reflect, an economically significant reduction in firm value. Finally, the correlation with reduced firm value is stronger for staggered boards that are established in the corporate charter (which shareholders cannot amend) than for staggered boards established in the company's bylaws (which shareholders can amend).

The data on which this paper is based is available for download at Lucian Bebchuk's home page.

This paper is listed in the Journal of Financial Economics’ “Hall of Fame” of influential JFE articles that have an average of 10 or more citations per year since publication.

Keywords: Corporate governance, Tobin's Q, firm value, agency costs, boards, directors, takeovers, tender offers, mergers and acquisitions, proxy fights, defensive tactics, antitakeover provisions, staggered boards, poison pills

JEL Classification: G30, G34, K22

Suggested Citation

Bebchuk, Lucian A. and Cohen, Alma, The Costs of Entrenched Boards. Journal of Financial Economics, Vol. 78, pp. 409-433, 2005, Harvard Law and Economics Discussion Paper No. 478, Available at SSRN: https://ssrn.com/abstract=556987 or http://dx.doi.org/10.2139/ssrn.556987

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

Cambridge, MA 02138
United States
617-495-3138 (Phone)
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HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/

European Corporate Governance Institute (ECGI) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Alma Cohen

Harvard Law School ( email )

Cambridge, MA 02138
United States
(617) 496-4099 (Phone)
(617) 812-0554 (Fax)

Tel Aviv University - Eitan Berglas School of Economics ( email )

Ramat Aviv, Tel Aviv, 69978
Israel

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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