Abstract
This paper shows that contrary to prevailing theories and empirical evidence, staggered corporate boards have no significant effect on firm value. One theory claims that a staggered board facilitates entrenchment of inefficient management and thus harms corporate value. Consequently, some institutional investors and shareholder rights advocates have argued for the elimination of the staggered board. The opposite theory, promoted by influential law firms, is that staggered boards are value enhancing since they enable the board to focus on long-term goals. Both theories are supported by prior studies and theoretical law review articles. We show that neither theory has empirical support. On average, the staggered board has no significant effect on firm value. Our research addresses estimation problems in previous studies: endogeneity of staggered board adoption, omitted variable bias and improper functional form of the estimated model. In a sample of up to 2,961 firms from 1990 to 2013 we find that once additional explanatory variables for firm value are included in the estimation, the effect of a staggered board on firm value becomes statistically insignificant. Addressing the endogeneity issue by employing the instrumental variable method, we again find that the staggered board has no significant effect on firm value. Once we account for the reasons that firms stagger or de-stagger their boards, the value effect of a staggered board becomes insignificant. This conclusion holds when using either industry fixed effects or firm fixed effects. Our results suggest caution about legal solutions which advocate wholesale adoption or repeal of the staggered board and instead evidence an individualized firm approach. They also provide a measure of skepticism for law-related corporate governance proposals generally.
Published Version
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