Classified Boards, Firm Value, and Managerial Entrenchment

51 Pages Posted: 24 Jan 2006

See all articles by Olubunmi Faleye

Olubunmi Faleye

Northeastern University - Finance Group


This paper shows that classified boards destroy value by entrenching management and reducing director effectiveness. First, I show that classified boards are associated with a significant reduction in firm value and that this holds even among complex firms, although such firms are often regarded as most likely to benefit from staggered board elections. I then examine how classified boards entrench management by focusing on CEO turnover, compensation incentives, proxy contests, and shareholder proposals. My results indicate that classified boards significantly insulate management from market discipline, thus suggesting that the observed reduction in value is due to managerial entrenchment and diminished board accountability.

Keywords: Classified boards, Managerial entrenchment, Executive compensation

JEL Classification: G34, G12

Suggested Citation

Faleye, Olubunmi, Classified Boards, Firm Value, and Managerial Entrenchment. Journal of Financial Economics, Forthcoming, Available at SSRN:

Olubunmi Faleye (Contact Author)

Northeastern University - Finance Group ( email )

Boston, MA 02115
United States

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