IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v37y2013i11p3993-4013.html
   My bibliography  Save this article

The differential effects of classified boards on firm value

Author

Listed:
  • Ahn, Seoungpil
  • Shrestha, Keshab

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 However, we find that this adverse impact of classified boards can be offset or even superseded by the potential benefits of board classification for firms who hope to benefit from the advisory services of their independent directors.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.

Suggested Citation

  • Ahn, Seoungpil & Shrestha, Keshab, 2013. "The differential effects of classified boards on firm value," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 3993-4013.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:11:p:3993-4013
    DOI: 10.1016/j.jbankfin.2013.07.029
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S037842661300304X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jbankfin.2013.07.029?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Stein, Jeremy C, 1988. "Takeover Threats and Managerial Myopia," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 61-80, February.
    2. Michael C. Jensen, 2010. "The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 43-58, January.
    3. Denis, David J. & Denis, Diane K. & Sarin, Atulya, 1997. "Ownership structure and top executive turnover," Journal of Financial Economics, Elsevier, vol. 45(2), pages 193-221, August.
    4. Bebchuk, Lucian A. & Cohen, Alma, 2005. "The costs of entrenched boards," Journal of Financial Economics, Elsevier, vol. 78(2), pages 409-433, November.
    5. Agrawal, Anup & Knoeber, Charles R, 2001. "Do Some Outside Directors Play a Political Role?," Journal of Law and Economics, University of Chicago Press, vol. 44(1), pages 179-198, April.
    6. Milton Harris & Artur Raviv, 2008. "A Theory of Board Control and Size," Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1797-1832, July.
    7. Booth, James R. & Deli, Daniel N., 1999. "On executives of financial institutions as outside directors," Journal of Corporate Finance, Elsevier, vol. 5(3), pages 227-250, September.
    8. Gilson, Stuart C., 1990. "Bankruptcy, boards, banks, and blockholders : Evidence on changes in corporate ownership and control when firms default," Journal of Financial Economics, Elsevier, vol. 27(2), pages 355-387, October.
    9. Brickley, James A. & Linck, James S. & Coles, Jeffrey L., 1999. "What happens to CEOs after they retire? New evidence on career concerns, horizon problems, and CEO incentives," Journal of Financial Economics, Elsevier, vol. 52(3), pages 341-377, June.
    10. Yermack, David, 1996. "Higher market valuation of companies with a small board of directors," Journal of Financial Economics, Elsevier, vol. 40(2), pages 185-211, February.
    11. Hermalin, Benjamin E & Weisbach, Michael S, 1998. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," American Economic Review, American Economic Association, vol. 88(1), pages 96-118, March.
    12. Armstrong, Christopher S. & Vashishtha, Rahul, 2012. "Executive stock options, differential risk-taking incentives, and firm value," Journal of Financial Economics, Elsevier, vol. 104(1), pages 70-88.
    13. DeAngelo, Harry & Rice, Edward M., 1983. "Antitakeover charter amendments and stockholder wealth," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 329-359, April.
    14. McConnell, John J. & Servaes, Henri, 1990. "Additional evidence on equity ownership and corporate value," Journal of Financial Economics, Elsevier, vol. 27(2), pages 595-612, October.
    15. Low, Angie, 2009. "Managerial risk-taking behavior and equity-based compensation," Journal of Financial Economics, Elsevier, vol. 92(3), pages 470-490, June.
    16. Brickley, James A. & Zimmerman, Jerold L., 2010. "Corporate governance myths: Comments on Armstrong, Guay, and Weber," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 235-245, December.
    17. Dittmar, Amy & Mahrt-Smith, Jan, 2007. "Corporate governance and the value of cash holdings," Journal of Financial Economics, Elsevier, vol. 83(3), pages 599-634, March.
    18. John E. Core & Wayne R. Guay & Tjomme O. Rusticus, 2006. "Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors' Expectations," Journal of Finance, American Finance Association, vol. 61(2), pages 655-687, April.
    19. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
    20. Paul Gompers & Joy Ishii & Andrew Metrick, 2003. "Corporate Governance and Equity Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(1), pages 107-156.
    21. Klein, April, 1998. "Firm Performance and Board Committee Structure," Journal of Law and Economics, University of Chicago Press, vol. 41(1), pages 275-303, April.
    22. Del Guercio, Diane & Dann, Larry Y. & Partch, M. Megan, 2003. "Governance and boards of directors in closed-end investment companies," Journal of Financial Economics, Elsevier, vol. 69(1), pages 111-152, July.
    23. Daines, Robert, 2001. "Does Delaware law improve firm value?," Journal of Financial Economics, Elsevier, vol. 62(3), pages 525-558, December.
    24. Lucian Arye Bebchuk & John C. Coates IV & Guhan Subramanian, 2002. "The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence and Policy," NBER Working Papers 8974, National Bureau of Economic Research, Inc.
    25. Rosenstein, Stuart & Wyatt, Jeffrey G., 1990. "Outside directors, board independence, and shareholder wealth," Journal of Financial Economics, Elsevier, vol. 26(2), pages 175-191, August.
    26. Goyal, Vidhan K. & Park, Chul W., 2002. "Board leadership structure and CEO turnover," Journal of Corporate Finance, Elsevier, vol. 8(1), pages 49-66, January.
    27. Paula L. Rechner & Dan R. Dalton, 1991. "CEO duality and organizational performance: A longitudinal analysis," Strategic Management Journal, Wiley Blackwell, vol. 12(2), pages 155-160, February.
    28. Duchin, Ran & Matsusaka, John G. & Ozbas, Oguzhan, 2010. "When are outside directors effective?," Journal of Financial Economics, Elsevier, vol. 96(2), pages 195-214, May.
    29. Benjamin E. Hermalin & Michael S. Weisbach, 2003. "Boards of directors as an endogenously determined institution: a survey of the economic literature," Economic Policy Review, Federal Reserve Bank of New York, vol. 9(Apr), pages 7-26.
    30. Coles, Jeffrey L. & Daniel, Naveen D. & Naveen, Lalitha, 2008. "Boards: Does one size fit all," Journal of Financial Economics, Elsevier, vol. 87(2), pages 329-356, February.
    31. Vijaya Subrahmanyam & Nanda Rangan & Stuart Rosenstein, 1997. "The Role of Outside Directors in Bank Aquisitions," Financial Management, Financial Management Association, vol. 26(3), Fall.
    32. Choi, Jongmoo Jay & Park, Sae Woon & Yoo, Sean Sehyun, 2007. "The Value of Outside Directors: Evidence from Corporate Governance Reform in Korea," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(4), pages 941-962, December.
    33. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    34. David A. Carter & Betty J. Simkins & W. Gary Simpson, 2003. "Corporate Governance, Board Diversity, and Firm Value," The Financial Review, Eastern Finance Association, vol. 38(1), pages 33-53, February.
    35. Parrino, Robert, 1997. "CEO turnover and outside succession A cross-sectional analysis," Journal of Financial Economics, Elsevier, vol. 46(2), pages 165-197, November.
    36. Anil Shivdasani & David Yermack, 1999. "CEO Involvement in the Selection of New Board Members: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 54(5), pages 1829-1853, October.
    37. Eliezer M. Fich & Anil Shivdasani, 2006. "Are Busy Boards Effective Monitors?," Journal of Finance, American Finance Association, vol. 61(2), pages 689-724, April.
    38. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation," Scholarly Articles 29407535, Harvard University Department of Economics.
    39. Boone, Audra L. & Casares Field, Laura & Karpoff, Jonathan M. & Raheja, Charu G., 2007. "The determinants of corporate board size and composition: An empirical analysis," Journal of Financial Economics, Elsevier, vol. 85(1), pages 66-101, July.
    40. Linck, James S. & Netter, Jeffry M. & Yang, Tina, 2008. "The determinants of board structure," Journal of Financial Economics, Elsevier, vol. 87(2), pages 308-328, February.
    41. Bates, Thomas W. & Becher, David A. & Lemmon, Michael L., 2008. "Board classification and managerial entrenchment: Evidence from the market for corporate control," Journal of Financial Economics, Elsevier, vol. 87(3), pages 656-677, March.
    42. Renée B. Adams & Daniel Ferreira, 2007. "A Theory of Friendly Boards," Journal of Finance, American Finance Association, vol. 62(1), pages 217-250, February.
    43. Chi, Jianxin Daniel & Scott Lee, D., 2010. "The conditional nature of the value of corporate governance," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 350-361, February.
    44. Guhan Subramanian, 2004. "The Disappearing Delaware Effect," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 20(1), pages 32-59, April.
    45. Faleye, Olubunmi, 2007. "Classified boards, firm value, and managerial entrenchment," Journal of Financial Economics, Elsevier, vol. 83(2), pages 501-529, February.
    46. Raheja, Charu G., 2005. "Determinants of Board Size and Composition: A Theory of Corporate Boards," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(2), pages 283-306, June.
    47. Laura Casares Field & Jonathan M. Karpoff, 2002. "Takeover Defenses of IPO Firms," Journal of Finance, American Finance Association, vol. 57(5), pages 1857-1889, October.
    48. Guo, Re-Jin & Kruse, Timothy A. & Nohel, Tom, 2008. "Undoing the powerful anti-takeover force of staggered boards," Journal of Corporate Finance, Elsevier, vol. 14(3), pages 274-288, June.
    49. Ronald W. Masulis & Cong Wang & Fei Xie, 2007. "Corporate Governance and Acquirer Returns," Journal of Finance, American Finance Association, vol. 62(4), pages 1851-1889, August.
    50. John Core & Wayne Guay, 2002. "Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 613-630, June.
    51. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-325, June.
    52. Lang, Larry H P & Stulz, Rene M, 1994. "Tobin's q, Corporate Diversification, and Firm Performance," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1248-1280, December.
    53. Lucian Bebchuk & Alma Cohen & Allen Ferrell, 2009. "What Matters in Corporate Governance?," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 783-827, February.
    54. Coles, Jeffrey L. & Daniel, Naveen D. & Naveen, Lalitha, 2006. "Managerial incentives and risk-taking," Journal of Financial Economics, Elsevier, vol. 79(2), pages 431-468, February.
    55. Callahan, William T. & Millar, James A. & Schulman, Craig, 2003. "An analysis of the effect of management participation in director selection on the long-term performance of the firm," Journal of Corporate Finance, Elsevier, vol. 9(2), pages 169-181, March.
    56. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kai Wang & Kun-Kun Xue & Jin-Hua Xu & Chien-Chi Chu & Sang-Bing Tsai & He-Jun Fan & Zhen-Yu Wang & Jiangtao Wang, 2018. "How Does a Staggered Board Provision Affect Corporate Strategic Change?—Evidence from China’s Listed Companies," Sustainability, MDPI, vol. 10(5), pages 1-13, May.
    2. Mohd Saad, Noriza & Haniff, Mohd Nizal & Ali, Norli, 2020. "Corporate governance mechanisms with conventional bonds and Sukuk’ yield spreads," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    3. Hongchao Zeng, 2014. "Financial Constraints, Antitakeover Protection, and Corporate Innovation: An Empirical Analysis using Antitakeover Legislation," Review of Economics & Finance, Better Advances Press, Canada, vol. 4, pages 1-15, August.
    4. Cremers, K.J. Martijn & Litov, Lubomir P. & Sepe, Simone M., 2017. "Staggered boards and long-term firm value, revisited," Journal of Financial Economics, Elsevier, vol. 126(2), pages 422-444.
    5. Anne Anderson & Jill Brown & Parveen P. Gupta, 2017. "Jurisdictional competition for corporate charters and firm value: a reexamination of the Delaware effect," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 14(4), pages 341-356, November.
    6. Tim R. Adam & Chitru S. Fernando & Jesus M. Salas, 2012. "Why Do Firms Engage in Selective Hedging?," SFB 649 Discussion Papers SFB649DP2012-019, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    7. Field, Laura Casares & Lowry, Michelle, 2022. "Bucking the trend: Why do IPOs choose controversial governance structures and why do investors let them?," Journal of Financial Economics, Elsevier, vol. 146(1), pages 27-54.
    8. Bennouri, Moez & Chtioui, Tawhid & Nagati, Haithem & Nekhili, Mehdi, 2018. "Female board directorship and firm performance: What really matters?," Journal of Banking & Finance, Elsevier, vol. 88(C), pages 267-291.
    9. Weili Ge & Lloyd Tanlu & Jenny Li Zhang, 2016. "What are the consequences of board destaggering?," Review of Accounting Studies, Springer, vol. 21(3), pages 808-858, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Renee B. Adams & Benjamin E. Hermalin & Michael S. Weisbach, 2010. "The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey," Journal of Economic Literature, American Economic Association, vol. 48(1), pages 58-107, March.
    2. James, Hui Liang & Borah, Nilakshi & Lirely, Roger, 2022. "The effectiveness of board independence in high-discretion firms," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 103-117.
    3. Masulis, Ronald W. & Wang, Cong & Xie, Fei, 2012. "Globalizing the boardroom—The effects of foreign directors on corporate governance and firm performance," Journal of Accounting and Economics, Elsevier, vol. 53(3), pages 527-554.
    4. Naeem Tabassum & Satwinder Singh, 2020. "Corporate Governance and Organisational Performance," Springer Books, Springer, number 978-3-030-48527-6, November.
    5. Bill Francis & Iftekhar Hasan & Qiang Wu, 2015. "Professors in the Boardroom and Their Impact on Corporate Governance and Firm Performance," Financial Management, Financial Management Association International, vol. 44(3), pages 547-581, September.
    6. Georgeta Vintila & Stefan Cristian Gherghina, 2013. "Board of Directors Independence and Firm Value: Empirical Evidence Based on the Bucharest Stock Exchange Listed Companies," International Journal of Economics and Financial Issues, Econjournals, vol. 3(4), pages 885-900.
    7. Chi, Jianxin Daniel & Scott Lee, D., 2010. "The conditional nature of the value of corporate governance," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 350-361, February.
    8. Mamdouh Abdulaziz Saleh Al-Faryan, 2021. "The effect of board composition and managerial pay on Saudi firm performance," Review of Quantitative Finance and Accounting, Springer, vol. 57(2), pages 693-758, August.
    9. Elyasiani, Elyas & Zhang, Ling, 2015. "Bank holding company performance, risk, and “busy” board of directors," Journal of Banking & Finance, Elsevier, vol. 60(C), pages 239-251.
    10. Hahn, Peter D. & Lasfer, Meziane, 2016. "Impact of foreign directors on board meeting frequency," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 295-308.
    11. Faleye, Olubunmi & Hoitash, Rani & Hoitash, Udi, 2011. "The costs of intense board monitoring," Journal of Financial Economics, Elsevier, vol. 101(1), pages 160-181, July.
    12. Schmidt, Breno, 2015. "Costs and benefits of friendly boards during mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 117(2), pages 424-447.
    13. Drobetz, Wolfgang & von Meyerinck, Felix & Oesch, David & Schmid, Markus, 2014. "Board Industry Experience, Firm Value, and Investment Behavior," Working Papers on Finance 1401, University of St. Gallen, School of Finance, revised Dec 2015.
    14. Cremers, K. J. Martijn & Litov, Lubomir P. & Sepe, Simone M., 2013. "Staggered Boards and Firm Value, Revisited," Working Papers 13-36, University of Pennsylvania, Wharton School, Weiss Center.
    15. Benson, Bradley W. & Chen, Yu & James, Hui L. & Park, Jung Chul, 2020. "So far away from me: Firm location and the managerial ownership effect on firm value," Journal of Corporate Finance, Elsevier, vol. 64(C).
    16. Coles, Jeffrey L. & Daniel, Naveen D. & Naveen, Lalitha, 2008. "Boards: Does one size fit all," Journal of Financial Economics, Elsevier, vol. 87(2), pages 329-356, February.
    17. Etienne Redor, 2016. "Board attributes and shareholder wealth in mergers and acquisitions: a survey of the literature," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 20(4), pages 789-821, December.
    18. Elyasiani, Elyas & Zhang, Ling, 2013. "Bank Holding Company Performance, Risk and "Busy" Board of Directors," Working Papers 13-24, University of Pennsylvania, Wharton School, Weiss Center.
    19. Franco Ernesto Rubino & Paolo Tenuta & Domenico Rocco Cambrea, 2017. "Board characteristics effects on performance in family and non-family business: a multi-theoretical approach," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 21(3), pages 623-658, September.
    20. Dahya, Jay & Golubov, Andrey & Petmezas, Dimitris & Travlos, Nickolaos G., 2019. "Governance mandates, outside directors, and acquirer performance," Journal of Corporate Finance, Elsevier, vol. 59(C), pages 218-238.

    More about this item

    Keywords

    Classified boards; Staggered boards; Corporate governance; Independent directors; Board composition;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:37:y:2013:i:11:p:3993-4013. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.