Classified Boards, Firm Value, and Managerial Entrenchment
Northeastern University - Finance Group
Journal of Financial Economics, Forthcoming
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.
Number of Pages in PDF File: 51
Keywords: Classified boards, Managerial entrenchment, Executive compensation
JEL Classification: G34, G12
Date posted: January 24, 2006