Impact of Classified Board on M&A Target Shareholder Value

Abstract

It is not certain whether classified board is beneficial or deleterious to shareholders. We examine the implication of classified board on target shareholder value in the mergers and acquisitions context. We also investigate the impact of classified board on firm’s innovative activities. We find the existence of a classified board in the M&A target firm is positively related to the target shareholder value, such as the M&A announcement CAR and the target premium, but only for R&D-intensive firms. We also find that classified board increases the quality of innovation for R&D intensive firms. Our findings are consistent with the view that classified board may provide long-term perspectives that promote productive but risky R&D investment, which acquiring firms are willing to pay higher premiums for. We also find that the potential managerial entrenchment effect of classified board is less pronounced than that of CEO-chairman duality, strengthening the proponent view of classified board. We contribute to the corporate governance literature on the relationship between classified board and firm performance. We provide evidence that classified board may enhance target shareholder value in M&A context via better R&D investment, which is distinct from enhancement by virtue of stronger bargaining power as posited in the extant literature. We also contribute to the innovation literature by showing that protection from the market for corporate control by classified board may promote firm’s innovative activities. Our findings suggest that classified board, an anti-takeover provision that many practitioners and policy makers suspect to be a managerial entrenchment mechanism that diminishes shareholder value, may not be universally harmful to shareholders. Rather, it may provide appropriate level of protection so that the management can invest in risky but value-enhancing innovative activities.