37 Pages Posted: 8 Dec 2003 Last revised: 29 Apr 2009
This paper investigates empirically how the value of publicly traded firms is affected by arrangements that protect management from removal. Staggered boards, which a majority of U.S. public companies have, substantially insulate boards from removal in either a hostile takeover or a proxy contest. We find that staggered boards are associated with an economically meaningful reduction in firm value (as measured by Tobin's Q). We also provide suggestive evidence that staggered boards bring about, and not merely reflect, an economically significant reduction in firm value. Finally, the correlation with reduced firm value is stronger for staggered boards that are established in the corporate charter (which shareholders cannot amend) than for staggered boards established in the company's bylaws (which shareholders can amend).
The data on which this paper is based is available for downloading at Lucian Bebchuk's home page.
Keywords: Corporate governance, Tobin's Q, firm value, agency costs, boards, directors, takeovers, tender offers, mergers and acquisitions, proxy fights, defensive tactics, antitakeover provisions, staggered boards, poison pills
JEL Classification: G30, G34, K22
Suggested Citation: Suggested Citation
Bebchuk, Lucian A. and Cohen, Alma, The Costs of Entrenched Boards. Journal of Financial Economics, Vol. 78, pp. 409-433, 2005; Harvard Law and Economics Discussion Paper No. 478. Available at SSRN: https://ssrn.com/abstract=556987 or http://dx.doi.org/10.2139/ssrn.556987