Staggered Boards and the Wealth of Shareholders: Evidence from Two Natural Experiments

36 Pages Posted: 13 Nov 2010 Last revised: 11 Jun 2014

Lucian A. Bebchuk

Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Alma Cohen

Tel Aviv University - Eitan Berglas School of Economics; Harvard Law School; National Bureau of Economic Research (NBER)

Charles C. Y. Wang

Harvard Business School

Multiple version iconThere are 2 versions of this paper

Date Written: June 2010

Abstract

While staggered boards have been documented to be negatively correlated with firm valuation, such association might be due to staggered boards either bringing about lower firm value or merely reflecting the tendency of low-value firms to have staggered boards. In this paper, we use two natural experiments to shed light on the causality question. In particular, we focus on two recent court rulings, separated by several weeks, that affected in opposite directions the antitakeover force of staggered boards: (i) a ruling by the Delaware Chancery Court approving the legality of shareholder-adopted bylaws that weaken the antitakeover force of a staggered board by moving the company’s annual meeting up from later parts of the calendar year to January, and (ii) the subsequent decision by the Delaware Supreme Court to overturn the Chancery Court ruling and invalidate such bylaws.

We find evidence consistent with the hypothesis that the Chancery Court ruling increased the value of affected companies – namely, companies with a staggered board and an annual meeting in later parts of the calendar year – and that the Supreme Court ruling produced a reduction in the affected companies’ value. The identified effects were most pronounced for firms for which control contests are especially relevant due to relative underperformance, small firm size, high asset pledgibility, or high takeover intensity in their industry.

Our findings have implications for the long-standing debate on staggered boards. The findings are consistent with the market’s viewing staggered boards as bringing about a reduction in firm value. Our findings are thus consistent with leading institutional investors’ policies in favor of board de-staggering, and with the view that the ongoing process of board de-staggering in public firms can be expected to enhance shareholder value.

Keywords: Corporate governance, staggered boards, takeover defenses, antitakeover provisions, proxy fights, Tobin's Q, firm value, agency costs, Delaware, chancery court, Airgas

JEL Classification: G30, G34, K22

Suggested Citation

Bebchuk, Lucian A. and Cohen, Alma and Wang, Charles C. Y., Staggered Boards and the Wealth of Shareholders: Evidence from Two Natural Experiments (June 2010). Harvard Law School John M. Olin Center Discussion Paper No. 697. Available at SSRN: https://ssrn.com/abstract=1706806 or http://dx.doi.org/10.2139/ssrn.1706806

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)

HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Alma Cohen

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

Ramat Aviv, Tel Aviv, 69978
Israel

Harvard Law School ( email )

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

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Charles C. Y. Wang

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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