Do Directors Have a Use-By Date? Examining the Impact of Board Tenure on Firm Performance

51 Pages Posted: 5 Feb 2016 Last revised: 3 Jun 2016

Joshua Livnat

New York University; Prudential Financial - Quantitative Management Associates

Gavin Smith

Prudential Financial - Quantitative Management Associates

Kate Suslava

Rutgers, The State University of New Jersey - Accounting

Martin B. Tarlie

Quantitative Management Associates

Date Written: February 23, 2016

Abstract

Corporate boards serve the important functions of monitoring and advising management. We examine whether corporate boards consisting of longer-serving directors are better able to fulfill these functions due to the firm-specific knowledge accumulation, or whether director performance suffers due to the deterioration of their technical knowledge and/or due to the decreasing independence of the board from managers. Using a sample of up to 3,000 firms over an 18-year period, our evidence suggests that board tenure is positively related to forward-looking measures of market value, with the relationship reversing after about 9 years on average. The detrimental effect of longer board tenure on market value (after an initial period of positive effects) is stronger for high growth firms, which is consistent with the deterioration of the board members’ ability to advise on the technical matters of firms’ operations.

Keywords: board tenure, firm value, abnormal returns, growth firms

JEL Classification: G32, G34, G38, M41

Suggested Citation

Livnat, Joshua and Smith, Gavin and Suslava, Kate and Tarlie, Martin B., Do Directors Have a Use-By Date? Examining the Impact of Board Tenure on Firm Performance (February 23, 2016). Available at SSRN: https://ssrn.com/abstract=2727473 or http://dx.doi.org/10.2139/ssrn.2727473

Joshua Livnat

New York University ( email )

44 West 4th Street, Suite 10-76
Stern School of Business
New York, NY 10012-1118
United States
212-998-0022 (Phone)
212-995-4004 (Fax)

Prudential Financial - Quantitative Management Associates ( email )

2 Gateway Center
6th Fl.
Newark, NJ 07102
United States

Gavin Smith

Prudential Financial - Quantitative Management Associates ( email )

2 Gateway Center
6th Fl.
Newark, NJ 07102
United States

Kate Suslava (Contact Author)

Rutgers, The State University of New Jersey - Accounting ( email )

94 Rockafeller Road
Piscataway, NJ 08854
United States

Martin B. Tarlie

Quantitative Management Associates ( email )

100 Mulberry Street
Gateway Center 2
Newark, NJ 07102
United States

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