Board Classification and Managerial Entrenchment: Evidence from the Market for Corporate Control

45 Pages Posted: 10 Aug 2006 Last revised: 22 Oct 2007

David A. Becher

Drexel University

Thomas W. Bates

Arizona State University - Department of Finance

Michael L. Lemmon

University of Utah - Department of Finance

Date Written: September 2007

Abstract

This paper considers the relation between board classification, takeover activity, and transaction outcomes for a panel of firms between 1990 and 2002. Target board classification does not change the likelihood that a firm, once targeted, is ultimately acquired. Moreover, shareholders of targets with a classified board realize bid returns that are equivalent to those of targets with a single class of directors, but receive a higher proportion of total bid surplus. Board classification does reduce the likelihood of receiving a takeover bid, however, the economic effect of bid deterrence on the value of the firm is quite small. Overall, the evidence is inconsistent with the conventional wisdom that board classification is an anti-takeover device that facilitates managerial entrenchment.

Keywords: Classified Board, Staggered Board, Merger, Acquisition, Managerial Entrenchment

JEL Classification: G34

Suggested Citation

Becher, David A. and Bates, Thomas W. and Lemmon, Michael L., Board Classification and Managerial Entrenchment: Evidence from the Market for Corporate Control (September 2007). HKUST Business School Research Paper No. 07-05. Available at SSRN: https://ssrn.com/abstract=923408 or http://dx.doi.org/10.2139/ssrn.923408

David A. Becher

Drexel University ( email )

3220 Market Street
1127 Gerri C LeBow Hall
Philadelphia, PA 19104
United States
215-895-2274 (Phone)
215-895-2295 (Fax)

Thomas W. Bates (Contact Author)

Arizona State University - Department of Finance ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Michael L. Lemmon

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-5210 (Phone)
801-581-7214 (Fax)

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