Classified Boards and Firm Value

Abstract

Classified boards constitute one of the most potent takeover defenses for U.S. firms today. However, as with takeover defenses more generally, economic theory offers an ambiguous prediction as to the effect that classified boards have on bottom-line firm value. A resolution of this ambiguity will require sound and convincing empirical methodology. In an effort to address limitations in the existing empirical literature, this article approaches the relationship between corporate governance and firm value while taking various measures to account for unobserved sources of heterogeneity across firms. Using the instrumental variables model developed by Hausman and Taylor, I find evidence of a negative and statistically significant association between classified board status and firm value. I confirm these findings using a variation of the difference-in- difference-in-difference model recently employed by Rauh. However, using quantile regressions, I find evidence suggesting that this negative association may be concentrated along the upper tail of the distribution of firm value.

Keywords: delaware, journal, corporate, law, classified board, takeover defense, governance, firm value, frakes, quantile regressions, negative association