Do Staggered Boards Affect Firm Value?

49 Pages Posted: 7 Apr 2017 Last revised: 30 Jun 2017

See all articles by Yakov Amihud

Yakov Amihud

New York University - Stern School of Business

Markus Schmid

University of St. Gallen - Swiss Institute of Banking and Finance; University of St. Gallen - School of Finance

Steven Davidoff Solomon

University of California, Berkeley - School of Law; University of California, Berkeley - Berkeley Center for Law, Business and the Economy

Date Written: June 29, 2017

Abstract

This paper shows that contrary to prevailing theories and empirical evidence, staggered corporate boards have no significant effect on firm value. One theory claims that a staggered board facilitates entrenchment of inefficient management and thus harms corporate value. Consequently, some institutional investors and shareholder rights advocates have argued for the elimination of the staggered board. The opposite theory, promoted by influential law firms, is that staggered boards are value enhancing since they enable the board to focus on long-term goals. Both theories are supported by prior studies and theoretical law review articles. We show that neither theory has empirical support. On average, the staggered board has no significant effect on firm value. Our research addresses estimation problems in previous studies: endogeneity of staggered board adoption, omitted variable bias and improper functional form of the estimated model. In a sample of up to 2,961 firms from 1990 to 2013 we find that once additional explanatory variables for firm value are included in the estimation, the effect of a staggered board on firm value becomes statistically insignificant. Addressing the endogeneity issue by employing the instrumental variable method, we again find that the staggered board has no significant effect on firm value. Once we account for the reasons that firms stagger or de-stagger their boards, the value effect of a staggered board becomes insignificant. This conclusion holds when using either industry fixed effects or firm fixed effects. Our results suggest caution about legal solutions which advocate wholesale adoption or repeal of the staggered board and instead evidence an individualized firm approach. They also provide a measure of skepticism for law-related corporate governance proposals generally.

Keywords: staggered board, classified boards, corporate governance, anti-takeover devices, E-Index,

JEL Classification: G34, K22

Suggested Citation

Amihud, Yakov and Schmid, Markus and Davidoff Solomon, Steven, Do Staggered Boards Affect Firm Value? (June 29, 2017). Available at SSRN: https://ssrn.com/abstract=2948141 or http://dx.doi.org/10.2139/ssrn.2948141

Yakov Amihud

New York University - Stern School of Business ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
212-998-0720 (Phone)
212-995-4233 (Fax)

Markus Schmid

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Rosenbergstrasse 52
St. Gallen, 9000
Switzerland

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Steven Davidoff Solomon (Contact Author)

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

University of California, Berkeley - Berkeley Center for Law, Business and the Economy ( email )

Berkeley, CA 94720-7200

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