The Effect of Entrenched Boards on Corporate Risk-Taking: Testing the Quiet Life Hypothesis

11 Pages Posted: 1 Mar 2013

See all articles by Pandej Chintrakarn

Pandej Chintrakarn

Mahidol University International College (MUIC)

Napatsorn Jiraporn

State University of New York at New Paltz

Pornsit Jiraporn

Pennsylvania State University - School of Graduate Professional Studies (SGPS)

Date Written: February 28, 2013

Abstract

The quiet life hypothesis posits that entrenched managers are well-insulated from removal and thus prefer to enjoy a quiet life, i.e. they tend to be less ambitious, avoid difficult decisions, and engage in less risk-taking (Bertrand and Mullainathan, 2003). We utilize the staggered board (or classified board) to test this hypothesis. The staggered board is a powerful takeover defense that enables inefficient managers to evade the discipline of the takeover market, thereby exacerbating managerial entrenchment (Bebchuk and Cohen, 2005). We find that managers entrenched by the staggered board adopt significantly less risky strategies, consistent with the quiet life hypothesis. In particular, the presence of a staggered board reduces the volatility of stock returns by 4.46%. We also show that our conclusion is unlikely affected by the presence of endogeneity.

Keywords: staggered boards, classified boards, entrenchment, risk taking, corporate governance, takeover defense, agency costs, agency theory, agency problems

JEL Classification: G30, G34

Suggested Citation

Chintrakarn, Pandej and Jiraporn, Napatsorn and Jiraporn, Pornsit, The Effect of Entrenched Boards on Corporate Risk-Taking: Testing the Quiet Life Hypothesis (February 28, 2013). Available at SSRN: https://ssrn.com/abstract=2226549 or http://dx.doi.org/10.2139/ssrn.2226549

Pandej Chintrakarn

Mahidol University International College (MUIC) ( email )

999 Buddhamonthon 4 Road
Salaya, Nakhonpathom, 73170
Thailand
66 (0) 2441 5090 (Phone)
66 (0) 2441 9745 (Fax)

Napatsorn Jiraporn

State University of New York at New Paltz ( email )

1 Hawk Drive
600 Hawk Drive
New Paltz, NY 12561-2443
United States

Pornsit Jiraporn (Contact Author)

Pennsylvania State University - School of Graduate Professional Studies (SGPS) ( email )

30 E. Swedesford Road
Malvern, PA 19355
United States
(484) 753-3655 (Phone)

HOME PAGE: http://www.personal.psu.edu/pxj11/index1.html

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