Board Declassification Activism: The Financial Value of the Shareholder Rights Project

Cremers, Martijn; Sepe, Simone M.

doi:10.2139/ssrn.2962162

Cited by 12 publications

(6 citation statements)

References 14 publications

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“…Cremers et al () show that value‐decreasing effect of board declassification becomes severer for firms more engaged in research and innovation, supporting the use of interaction term between CBoard and HRD in our specification.…”

supporting

confidence: 72%

“…Consistent with this argument, Faleye et al () show that intense monitoring on the management leads to diminished corporate innovation. Becker‐Blease (), Chemmanur and Tian (), and Cremers et al () provide evidence that classified boards are positively related to firm value and innovation, and Cremers et al () show that board declassification is associated with significant firm value decrease. While previous literature mainly investigates the positive impact of classified boards on firm value measured by Tobin's Q or innovation output, we focus on the M&A target valuation because it provides an advantage in measuring the value of R&D investment…”

Section: Literature Reviewmentioning

confidence: 99%

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Impact of Classified Board on M&A Target Shareholder Value: Nurturing Innovation through Entrenchment

2018

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We find that classified board in the M&A target firm is positively related to the target shareholder value, but only for firms with both intensive R&D investment and strong external governance. We also find that firms with classified board exhibit superior quality innovation when they have both intensive R&D investment and strong external governance. These findings are consistent with the view that classified board provides long‐term perspectives that promote productive but risky R&D investment, which is highly valued in M&A. Our findings are distinct from the view expressed in extant literature that classified board enhances target shareholder value because of stronger bargaining power.

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supporting

confidence: 72%

Section: Literature Reviewmentioning

confidence: 99%

Impact of Classified Board on M&A Target Shareholder Value: Nurturing Innovation through Entrenchment

2018

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“…In our new study that we have provisionally called "Boards Declassification Activism," we have done a kind of post-mortem on what actually happened to those companies that declassified their boards after being targeted by the shareholder rights project. 2 And much as we found in our study of earlier destaggerings, the companies targeted by the Harvard Law Shareholder Rights project underperformed after their declassifications.…”

Section: Martijn Cremerssupporting

confidence: 52%

Columbia Law School Roundtable on A Governance Research Agenda for the Academy

Cremers

Khanna

Gordon

2017

J Applied Corp Finance

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Since Jensen and Meckling's formulation of the theory of “agency costs” in 1976, corporate finance and governance scholars have produced a large body of research that attempts to identify the most important features and practices of effective corporate governance systems. But for all the research that has been done in the past 40 years, many practitioners continue to see a disconnect between theory and practice, between the questions researched and the questions that need to be answered. In this roundtable, Martijn Cremers begins by challenging the conventional view that limiting “agency costs” is the main challenge confronted by boards of directors in representing shareholder interests and, hence, the proper focus of most governance scholarship. Especially in today's economy, with the high values assigned to growth companies, the most important function of corporate governance may instead be to overcome the problem of American “short termism” that he attributes to “inadequate shareholder commitment to long‐term cooperation.” And he buttresses his argument with the findings of his own recent research suggesting that obstacles to the workings of the corporate control market like staggered boards and supermajority voting requirements may actually improve long‐run corporate performance by lengthening the decision‐making horizon of boards and the managements they supervise. Vik Khanna discusses Indian Corporate Social Responsibility (CSR) spending and its effects in light of a recent law requiring Indian companies of a certain size to devote at least 2% of their after‐tax profit to CSR initiatives. One unintended effect of this mandate, which took effect in 2010, was that all Indian companies that were spending more than the prescribed 2% of profits cut their expenditure back to that minimum, suggesting that CSR and advertising are substitutes to some extent, and that such legal mandates can discourage CSR spending by early adapters or “leaders.” Nevertheless, Khanna also found evidence of social norms developing in support of CSR, including a spreading perception that such spending can help some companies achieve strategic goals. Jeff Gordon closes by arguing that, to the extent investors are short‐sighted, their short‐sightedness is likely to be justified by their recognition that public company directors have neither the information nor the incentives to do an effective job of monitoring corporate managements. The best solution to the problems with U.S. corporate governance is to replace today's “thinly informed” directors with “activist” directors who more closely resemble the directors of private‐equity owned firms. Such directors would spend far more time with, and be much more knowledgeable about, corporate management and operations—and they would have much more of their personal wealth at stake in the form of company stock.

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“…In contrast, reduced market attention can improve innovation output. For example, higher anti-takeover provisions result in both more patents and more cited patents (Chemmanur and Tian 2018), and declassifying boards (removing staggered boards) results in declines in firm value, particularly among firms focused on research and innovation (Cremers and Sepe 2017). Our research complements this literature by revealing the unintended adverse consequences of increased risk disclosure on innovation.…”

Section: Literature Reviewmentioning

confidence: 55%

Too Much of a Good Thing? Risk Disclosure and Corporate Innovation.

Au¹

2020

Preprint

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Using textual analysis of a large sample of 10-K filings for US firms, we find a negative relationship between the extent of risk disclosure and corporate innovation as measured by R&D, patents, and citations. By exploiting two exogenous shocks, we find that it is the increase in the extent of risk disclosure rather than a change in fundamental firm risk that reduces corporate innovation. Further analysis shows that the channel for the innovation decline is due to financial constraints, with risk disclosure having a larger negative impact on innovation among firms with financial constraints. These results are consistent with theoretical predictions that increased disclosure can have unintended consequences for firms making uncertain investments, such as innovation.

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Board Declassification Activism: The Financial Value of the Shareholder Rights Project

Cited by 12 publications

References 14 publications

Impact of Classified Board on M&A Target Shareholder Value: Nurturing Innovation through Entrenchment

Impact of Classified Board on M&A Target Shareholder Value: Nurturing Innovation through Entrenchment

Columbia Law School Roundtable on A Governance Research Agenda for the Academy

Too Much of a Good Thing? Risk Disclosure and Corporate Innovation.

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