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The differential effects of classified boards on firm value

Seoungpil Ahn () and Keshab Shrestha

Journal of Banking & Finance, 2013, vol. 37, issue 11, 3993-4013

Abstract: Classified boards actually benefit firms that have low monitoring costs and greater needs for advisory services. Previous literature has emphasized the entrenchment effect of classified boards. However, we find that this adverse impact of classified boards can be offset or even superseded by the potential benefits of board classification for firms who hope to benefit from the advisory services of their independent directors. We show that firms with greater advising needs appoint more outside directors with diverse attributes and expertise, qualifications that enhance the ability to provide useful advice to managers. Furthermore, in such firms, board classification is associated with higher performance sensitivity of forced CEO turnover and better acquisition performance. Conversely, in firms with high monitoring costs, board classification hurts managerial equity-based incentives and risk-taking incentives. These findings suggest how and through which channels classified boards engender the differential effects on firm value.

Keywords: Classified boards; Staggered boards; Corporate governance; Independent directors; Board composition (search for similar items in EconPapers)
JEL-codes: G32 G34 K22 (search for similar items in EconPapers)
Date: 2013
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