Capital Structure, Staggered Boards, and Firm Value

Abstract

Grounded in agency theory, this study investigates whether staggered boards influence capital structure choices. Leverage has been argued and shown to alleviate agency costs. As staggered boards can entrench inefficient managers, they may motivate managers to adopt a lower level of debt, thereby avoiding the disciplinary mechanisms associated with leverage. The empirical evidence supports this hypothesis, showing that firms with a staggered board are significantly less leveraged than those with a unitary board. We also find that the impact of staggered boards on capital structure choices exists both in industrial and regulated firms although it seems to vanish after the enactment of the Sarbanes-Oxley Act. Cognizant of possible endogeneity, we show that staggered boards likely bring about, and do not merely reflect, lower leverage. Finally, we explore whether firm value is affected by abnormal leverage that can be attributed to the presence of staggered boards. The results demonstrate no significant adverse impact on firm value due to excess leverage.

Keywords: structure, classified boards, staggered boards, corporate governance

JEL Classification: G30, G32, G34, G38