Zombie Boards: Board Tenure and Firm Performance

Abstract

In this paper I show that board tenure exhibits an inverted U-shaped relation with firm value. The value and quality of corporate decisions such as M&A, financial reporting, CEO compensation and replacement, and innovation also depend non-linearly on board tenure. The results are consistent with directors’ on-the-job learning improving firm value up to some threshold, at which point entrenchment dominates and firm value suffers. The paper further shows that the inverted U-shaped relation remains even when holding board composition constant, suggesting that the benefits and costs of learning and entrenchment (above and beyond those driven by changes in board composition) change over time and hence affect firm decisions and performance. To address endogeneity concerns, I use a sample of sudden deaths of outside directors and find that sudden deaths that move board tenure away from (toward) the empirically observed maximum are associated with a negative (positive) announcement return.