What are the consequences of board destaggering?

What are the consequences of board destaggering? In this paper, we examine the consequences of the decision to destagger the election of directors using a sample of firms that switched from a staggered to a destaggered board structure from 2002 through 2010. We find that the likelihood of destaggering increases in shareholder activism, firm size, and poor prior accounting performance. Furthermore, we find that firms that destagger tend to have larger boards and a lower entrenchment index prior to destaggering. We then use our determinants model to identify a sample of control firms that maintained a staggered board structure. Employing a difference-in-differences research design, we find that, relative to our control firms, firms that destaggered experience declines in Tobin’s q and accounting performance, measured by ROA. In addition, the negative effect on Tobin’s q is most pronounced in firms with greater advisory needs, consistent with the notion that destaggering results in worse performance when the advisory role of boards is more important. Contrary to claims made by proponents of destaggered boards, we find no evidence that CEOs are less entrenched after destaggering. We also provide some evidence suggesting that investment in R&D falls in the post-destaggering period, consistent with the view that after destaggering board members have shortened incentive horizons. Taken together, our evidence is contrary to the earlier studies that claim that destaggered boards are generally optimal and value-increasing. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

What are the consequences of board destaggering?

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Publisher
Springer US
Copyright
Copyright © 2016 by Springer Science+Business Media New York
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance & Economics
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-016-9362-2
Publisher site
See Article on Publisher Site

Abstract

In this paper, we examine the consequences of the decision to destagger the election of directors using a sample of firms that switched from a staggered to a destaggered board structure from 2002 through 2010. We find that the likelihood of destaggering increases in shareholder activism, firm size, and poor prior accounting performance. Furthermore, we find that firms that destagger tend to have larger boards and a lower entrenchment index prior to destaggering. We then use our determinants model to identify a sample of control firms that maintained a staggered board structure. Employing a difference-in-differences research design, we find that, relative to our control firms, firms that destaggered experience declines in Tobin’s q and accounting performance, measured by ROA. In addition, the negative effect on Tobin’s q is most pronounced in firms with greater advisory needs, consistent with the notion that destaggering results in worse performance when the advisory role of boards is more important. Contrary to claims made by proponents of destaggered boards, we find no evidence that CEOs are less entrenched after destaggering. We also provide some evidence suggesting that investment in R&D falls in the post-destaggering period, consistent with the view that after destaggering board members have shortened incentive horizons. Taken together, our evidence is contrary to the earlier studies that claim that destaggered boards are generally optimal and value-increasing.

Journal

Review of Accounting StudiesSpringer Journals

Published: Jun 28, 2016

References

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