Board Declassification Activism: Why Run Away from the Evidence?

Abstract

In a recently released paper, “Board Declassification Activism: The Financial Value of the Shareholder Rights Projects,” we investigated the effects on firm value of board declassifications promoted by the Shareholder Rights Project (SRP), a clinical program held at Harvard Law School for three academic years (2011-2014). Consistent with the results we obtained in our prior published work on staggered boards, we find a negative effect of SRP declassifications on firm value, both in absolute terms and relative to declassifications occurring at firms that were not targeted by the SRP over the same period. Economically, the negative effect of SRP declassifications corresponds to an average decline in financial value in the range of $0.96 - $1.6 billion per declassifying SRP target or, aggregated across the 93 SRP-declassifications included in our sample, an overall loss in the range of $90 - $149 billion.

In a response note, Lucian Bebchuk and Alma Cohen “contest” our results, arguing that they do not provide a basis for opposing board declassification, when appropriately interpreted. This reply responds to the Bebchuk-Cohen critique. We show that not only their critique is unwarranted, but also fails to engage with our main finding that the plausibly exogenous shock caused by the SRP’s declassification activism was followed by substantial declines in firm value.

Keywords: staggered board, declassification, firm value, shareholder activism, shareholder proposals, legal clinic