Staggered boards and long-term firm value, revisited

Abstract

This paper revisits the association between firm value (as proxied by Tobin's Q) and whether the firm has a staggered board. As is well known, in the cross-section firms with a staggered board tend to have a lower value. Using a comprehensive sample for 1978 -2011, we show an opposite result in the time series: firms that adopt a staggered board increase in firm value, while de-staggering is associated with a decrease in firm value. We further show that the decision to adopt a staggered board seems endogenous, and related to an ex ante lower firm value, which helps reconciling the existing cross-sectional results to our novel time series results. To explain our new results, we explore potential incentive problems in the shareholder-manager relationship. Short-term oriented shareholders may generate myopic incentives for the firm to underinvest in risky long-term projects. In this case, a staggered board may helpfully insulate the board from opportunistic shareholder pressure. Consistent with this, we find that the adoption of a staggered board has a stronger positive association with firm value for firms where such incentive problems are likely more severe: firms with more R&D, more intangible assets, more innovative and larger and thus likely more complex firms.

Institutional and Legal Context in Natural Experiments: The Case of State Antitakeover Laws

“…For example, Dittmar and Mahrt‐Smith () and John, Litov, and Yeung () find stronger results with the G‐index than the E‐index (indicating that provisions other than classified boards matter), and Hwang and Kim (), Harford, Humphery‐Jenner, and Powell (), and Johnson, Karpoff, and Yi () find stronger results using broad indices of takeover defenses compared to using only classified boards. Cremers, Litov, and Sepe () also find that the takeover defense‐related results in Cuñat, Gine, and Guadalupe () are driven by takeover defenses other than classified boards, also indicating that a variety of defenses offer incremental takeover protection.…”

Goodwill valuations certified by independent experts: Bigger and cleaner impairments?

“…When a firm discloses the use of an independent expert (treatment firm), we record this as year τ = 0 and then test for lead (τ ∈ {−3, −2, −1}) and lag effects (τ ∈ {0, 1, 2, 3}) by using event‐time dummies, with α τ for lead effects and β τ for lag effects. To examine the level of goodwill impairment conditional on the disclosure of the use of an expert, we adopt a model equivalent to the difference‐in difference model of Cremers, Litov, and Sepe (). We focus on the (treatment indicator) event when a firm discloses the use of an expert and whether the reported level of goodwill impairment is different from that of other firms that do not make such a disclosure.…”

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

“…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…”

“…This contradictory effect may be mitigated under strong external governance that controls managerial slack (Giroud and Mueller 2010). Kadyrzhanova and Rhodes-Kropf 2011), or been focused on firm value measured by Tobin's Q or innovation (e.g., Becker-Blease 2011; Cremers et al 2017a;Chemmanur and Tian 2018). The study by Humphery-Jenner (2014) is the closest to this study, but the subject of his research is acquiring firms, not targets, and the effects of R&D intensity and external governance are not considered.…”

“…To the best of our knowledge, this is the first study to relate classified boards to target shareholder value through better R&D and innovation. While existing studies show the positive impact of classified boards, they have mainly been concerned with either stronger bargaining power (e.g., Comment and Schwert ; Bates et al ; Kadyrzhanova and Rhodes‐Kropf ), or been focused on firm value measured by Tobin's Q or innovation (e.g., Becker‐Blease ; Cremers et al ; Chemmanur and Tian ). The study by Humphery‐Jenner () is the closest to this study, but the subject of his research is acquiring firms, not targets, and the effects of R&D intensity and external governance are not considered.…”