Staggered Boards and Long-Term Firm Value, Revisited

For a long time, the academic literature has largely supported the view that staggered boards — which require challengers to win at least two election cycles to gain a board majority — entrench directors and managers to the detriment of shareholders.[1] Empirically, this view was based on the finding of a negative association between having a staggered board and firm value. In our new article, “Staggered Boards and Long-Term Firm Value, Revisited,” forthcoming in the Journal of Financial Economics, we reconsider the staggered board debate using a comprehensive sample period (1978–2015) and document evidence that suggests the opposite conclusion.

Focusing on the long-term association of firm value with staggered boards, we find that the adoption of a staggered board has a statistically and economically significant positive impact on firm value. Accordingly, our study challenges the one-size-fits-all policy that favors the annual election of directors and is currently supported by many proxy advisory firms and other shareholder advocates. As previously explored in our paper, “The Shareholder Value of Empowered Boards,” published in the Stanford Law Review in 2016, this indicates that it might be the right time for policymakers as well as institutional investors to reconsider the role of staggered boards in corporate governance.

Our new study provides a comprehensive econometric analysis by performing several tests to evaluate the causal relationship between the adoption of a staggered board and firm value. These tests include regressions of changes in value on changes in board structure, different matching procedures, dynamic GMM estimation, and exogenous variation in Massachusetts corporate law. These results confirm that there is no evidence that staggered boards have a negative association with firm value. Rather, we document that adopting (removing) a staggered board is associated with an increase (decrease) in long-term firm value, especially in more innovative firms or where stakeholder investments are more relevant (e.g., with a large customer or in a strategic alliance).

Among others, the identification strategies that we employ to mitigate endogeneity concerns (i.e., the risk of mistaking correlation for causation) include the following:

  • We create several matched samples in which we match each firm with a changing board structure in a given year to a firm with the same ex-ante board structure and similar observable characteristics that are related to board structure and performance, but which did not change its board structure in that year. The matched samples confirm the positive (negative) relation between the adoption (removal) of a staggered board and firm value.
  • We conduct a long-term event study exploiting plausibly exogenous variation in board structure due to changes in Massachusetts’ corporate law. In 1990, Massachusetts made staggered boards “quasi-mandatory” by requiring firms incorporated in the state to adopt a staggered board by default and making it difficult to opt out of this requirement. We compare the value of Massachusetts firms in the few years before and after this legal change in a matched sample of firms, where the control firms are incorporated outside of Massachusetts but have a similar size, are in the same industry, and have the same board structure as the Massachusetts firms. After the legal change, the value of the Massachusetts firms increased more than the value of their control firms.
  • We examine the economic channels through which a staggered board could be associated with an increase in long-term firm value, i.e., the myopic market hypothesis and the bonding hypothesis. Under the myopic market hypothesis, staggered boards can help mitigate managers’ incentives to over-invest in short-term projects if investors are relatively uninformed. Under the bonding hypothesis, having a staggered board might help bond the board’s commitment to the relationship-specific investments made by the firm’s stakeholders, reducing the likelihood that the firm’s business strategy is changed through a takeover and thus lowering the risk that takeovers will impose costs on stakeholders. Our results suggest that both economic channels could play a role, although overall the results seem more consistent with the bonding hypothesis. In particular, we document that the adoption (removal) of a staggered board has a positive (negative) association with firm value among firms with stronger stakeholder relationships, such as firms with large customers, productive employees, and in strategic alliances. We similarly find that the adoption (removal) of staggered boards has a more positive (negative) association with firm value among firms whose projects require longer-term investments and are likely harder to value by outside investors, such as firms with more investments in innovation and intangibles. Conversely, using proxies that other research has linked to myopic investment behavior,[2] we find no evidence that the association between staggered boards and firm value is stronger for firms with more short-term institutional investors.

Overall, our results confirm that the long-dominant entrenchment view of staggered boards is not supported by the data, while indicating that staggered boards could contribute to firm value by preventing inefficient takeovers or serving to bond a firm’s commitment to the firm’s long-term stakeholders. Accordingly, we hope that our new results will encourage proxy advisory firms and shareholder advocates to reconsidering any one-size-fits-all opposition to staggered boards.

ENDNOTES

[1] See Gompers, Ishi and Metrick, 2003; Bebchuk and Cohen, 2005; Masulis, Wang, and Xie, 2007; Faleye, 2007; Bebchuk, Cohen and Ferrell, 2009.

[2] See Bushee, 1998; Cremers, Pareek, and Sautner, 2016.

This post comes to use from Professor Martijn Cremers at the University of Notre Dame’s Mendoza College of Business and Professor Simone M. Sepe at the University of Arizona’s James E. Rogers College of Law and Institute for Advanced Study in Toulouse—Fondation Jean-Jacques Laffont—Toulouse School of Economics. It is based on their recent article, coauthored with Lubomir P. Litov, “Staggered Boards and Long-Term Firm Value, Revisited,” available here. The online appendix is available here.