Term Length and the Role of Independent Directors in Acquisitions

Abstract

This paper shows that boards impact acquisition decisions. To identify a causal effect, I exploit variation in the time remaining to terms of directors in tri-class staggered boards, where exogenous cycles determine directors’ insulation from electoral pressures, thereby moderating their incentives to allocate resources. I find that long remaining terms are associated with lower returns around acquisition announcements and with a higher likelihood of undertaking acquisitions. Within an acquiring board, the independent directors with longer terms are more likely to have had preexisting network ties to the target firms through their professional network. While there are competing theoretical predictions about whether longer appointments strengthen or weaken directors’ incentives to serve shareholders, these findings are consistent with a detrimental effect of long terms, and imply that directors’ actions have real consequences for acquisitions.