Classified Boards, the Cost of Debt, and Firm Performance
61 Pages Posted: 23 Dec 2010 Last revised: 11 Aug 2014
Date Written: August 10, 2014
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.
Keywords: classified board, staggered boards, corporate governance, agency cost of debt, firm performance, antitakeover, risk-taking, disclosure, transparency
JEL Classification: G30, G34
Suggested Citation: Suggested Citation