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

55 Pages Posted: 26 Oct 2008  

Rasha Ashraf

Georgia State University - Department of Finance

Rajesh Chakrabarti

OP Jindal Global University; Wadhwani Foundation

Richard Fu

San Jose State University - Accounting & Finance

Narayanan Jayaraman

Georgia Institute of Technology - Scheller College of Business

Date Written: October 25, 2008

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.

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

JEL Classification: G30, G34

Suggested Citation

Ashraf, Rasha and Chakrabarti, Rajesh and Fu, Richard and Jayaraman, Narayanan, Takeover Immunity, Takeovers and the Market for Non-Executive Directors (October 25, 2008). Available at SSRN: https://ssrn.com/abstract=1289582 or http://dx.doi.org/10.2139/ssrn.1289582

Rasha Ashraf

Georgia State University - Department of Finance ( email )

35 Broad Street
Suite 1238
Atlanta, GA 30303
United States
404-413-7348 (Phone)
404-894-6030 (Fax)

Rajesh Chakrabarti (Contact Author)

OP Jindal Global University ( email )

India

Wadhwani Foundation ( email )

Subramanya Tech Park
EOIZ Industrial Area
Whitefield, Bengaluru 560066
India

Richard Fu

San Jose State University - Accounting & Finance ( email )

United States

Narayanan Jayaraman

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-4389 (Phone)
404-894-6030 (Fax)

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