Zombie Board: Board Tenure and Firm Performance

Posted: 6 Oct 2018

See all articles by Sterling Huang

Sterling Huang

Singapore Management University - School of Accountancy

Gilles Hilary

Georgetown University - Department of Accounting and Business Law

Date Written: September 1, 2018

Abstract

We show that board tenure exhibits an inverted U‐shaped relation with firm value and accounting performance. The quality of corporate decisions, such as M&A, financial reporting quality, and CEO compensation, also has a quadratic relation with board tenure. Our results are consistent with the interpretation that directors’ on‐the‐job learning improves firm value up to a threshold, at which point entrenchment dominates and firm performance suffers. To address endogeneity concerns, we use a sample of firms in which an outside director suffered a sudden death, and find that sudden deaths that move board tenure away from (toward) the empirically observed optimum level in the cross‐section are associated with negative (positive) announcement returns. The quality of corporate decisions also follows an inverted U‐shaped pattern in a sample of firms affected by the death of a director.

Keywords: board tenure; firm value; corporate policies; learning; entrenchment

JEL Classification: G30; G32; G34; G38; J33; J44; M41

Suggested Citation

Huang, Sterling and Hilary, Gilles, Zombie Board: Board Tenure and Firm Performance (September 1, 2018). Journal of Accounting Research, Vol. 56, No. 4, 2018; Georgetown McDonough School of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=3249092

Sterling Huang (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore
6808 7929 (Phone)

Gilles Hilary

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

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