The Effect of Entrenched Boards on Corporate Risk-Taking: Testing the Quiet Life Hypothesis
11 Pages Posted: 1 Mar 2013
Date Written: February 28, 2013
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: Suggested Citation