Staggered Boards and the Wealth of Shareholders: Evidence from Two Natural Experiments

Lucian Bebchuk (), Alma Cohen and Charles C.Y. Wang

No 17127, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: While staggered boards have been documented to be negatively correlated with firm valuation, such association might be due to staggered boards either bringing about lower firm value or merely reflecting the tendency of low-value firms to have staggered boards. In this paper, we use two natural experiments to shed light on the causality question. In particular, we focus on two recent court rulings, separated by several weeks, that affected in opposite directions the antitakeover force of staggered boards: (i) a ruling by the Delaware Chancery Court approving the legality of shareholder-adopted bylaws that weaken the antitakeover force of a staggered board by moving the company's annual meeting up from later parts of the calendar year to January, and (ii) the subsequent decision by the Delaware Supreme Court to overturn the Chancery Court ruling and invalidate such bylaws. We find evidence consistent with the hypothesis that the Chancery Court ruling increased the value of affected companies - namely, companies with a staggered board and an annual meeting in later parts of the calendar year - and that the Supreme Court ruling produced a reduction in the affected companies' value. The identified effects were most pronounced for firms for which control contests are especially relevant due to relative underperformance, small firm size, high asset pledgibility, or high takeover intensity in their industry. Our findings have implications for the long-standing debate on staggered boards. The findings are consistent with the market's viewing staggered boards as bringing about a reduction in firm value. Our findings are thus consistent with leading institutional investors' policies in favor of board de-staggering, and with the view that the ongoing process of board de-staggering in public firms can be expected to enhance shareholder value.

JEL-codes: G30 G34 K22 (search for similar items in EconPapers)
Date: 2011-06
Note: CF LE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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