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STAGGERED BOARDS AND FIRM VALUE, REVISITED Martijn Cremers (University of Notre Dame) bomir P. Litov (Univ. of Arizona & WFC, Univ. of Pennsylvania Simone M. Sepe (Univ. of Arizona & IAST-TSE) University of Nebraska, September 29 th 2014

Staggered Boards and Firm Value, Revisited

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Staggered Boards and Firm Value, Revisited. Martijn Cremers (University of Notre Dame) Lubomir P. Litov (Univ. of Arizona & WFC, Univ. of Pennsylvania) Simone M. Sepe (Univ. of Arizona & IAST-TSE). University of Nebraska, September 29 th 2014. The Staggered Board Controversy. - PowerPoint PPT Presentation

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Page 1: Staggered Boards and Firm Value,  Revisited

STAGGERED BOARDS AND FIRM VALUE,

REVISITED

Martijn Cremers (University of Notre Dame)

Lubomir P. Litov (Univ. of Arizona & WFC, Univ. of Pennsylvania)

Simone M. Sepe (Univ. of Arizona & IAST-TSE)

University of Nebraska, September 29th 2014

Page 2: Staggered Boards and Firm Value,  Revisited

2

• Staggered Boards (SBs): – boards with 3 classes of directors.

– one class standing for re-election each year, each serving 3-year terms.

Quintessential corporate governance failure

or

Strengthening board commitment to long-term value creation?

THE STAGGERED BOARD CONTROVERSY

Page 3: Staggered Boards and Firm Value,  Revisited

• Empirical literature to date documents that firms with SBs have lower financial value (e.g., Bebchuk & Cohen, 2005; Faleye, 2007; ISS, 2013; Cohen and Wang, 2013)

– Purely cross-sectional result.

– Literature interprets this as SBs reducing firm value.

• Our paper challenges this interpretation using 1978-2011 data.

– Finding that staggering up (down) is associated with increase (decrease) in financial value (proxied by Q). 33

NO CONTROVERSY IN EMPIRICAL LITERATURE

Page 4: Staggered Boards and Firm Value,  Revisited

I. THE TRADITIONAL (DELAWARE) VIEW

• Representative Democracy model (Strine, 2006)

Director Primacy With accountability mechanisms

Shareholders: less expertise, incentives, information

II. THE SHAREHOLDER EMPOWERMENT VIEW

• Direct Democracy (Bebchuk, HLR 2005)

Shareholder empowerment

THEORETICAL BACKGROUND

Page 5: Staggered Boards and Firm Value,  Revisited

REPRESENTATIVE VS. DIRECT DEMOCRACY GOVERNANCE

ROME GOVERNANCE VS. ATHENS GOVERNANCE

Page 6: Staggered Boards and Firm Value,  Revisited

666

SEPARATION OF OWNERSHIP AND CONTROL• Gives rise to twin ‘Agency Problems’:

• Moral Hazard (of agent)

• Due to management–shareholder conflict of interest.

• Addressed by Shareholder Empowerment View.

• Limited Commitment of shareholders to defer judgment.

• Due to asymmetric information + adverse selection.

• Addressed by Director Primacy View.

• Trade-off

• Between market discipline and board decision making.

• Not ‘one-size-fits-all’ corporate governance.

THEORY: WHICH AGENCY PROBLEM?

Page 7: Staggered Boards and Firm Value,  Revisited

7

AN ONGOING DEBATE

Lipton, Wachtell, Rosen & Katz, February 2013 Memo, “The Shareholder Rights Project Is Wrong” (The New York Times):

“It is surprising that a major academic institution would countenance the formation of a clinical program to advance a narrow agenda that would exacerbate the short-term pressures under which American companies are forced to operate.”

Professor Bebchuk, CLR 2013:“None of the organizations that press for board insulation in the name of long- term value …, such as … Wachtell, Lipton, Rosen & Katz, have thus far attempted to conduct or commission research that would use the substantial data available on the financial performance of firms and shareholders to validate their myopic activists hypothesis.”

Page 8: Staggered Boards and Firm Value,  Revisited

SHAREHOLDER RIGHTS PROJECT

Page 9: Staggered Boards and Firm Value,  Revisited

• Staggered Boards– 1978–1989 from Cremers & Ferrell (2013)

database, & hand-collected information.– 1990–2011 from Risk Metrics, previously

Investor Responsibility Research Center (IRRC).

» Hand-checked missing years in the 1993–2006 using proxy statements (SEC’s EDGAR).

– Charter vs. Bylaws Staggered Boards.– Bebchuk and Cohen (2005); Cremers and Ferrell

(2013).

• Firm Value– Q (Compustat).– Stock Return (CRSP).

DATA

Page 10: Staggered Boards and Firm Value,  Revisited

Year # % Year # %

           

1978 810 2.57 1995 861 2.73

1979 787 2.49 1996 861 2.73

1980 770 2.44 1997 860 2.72

1981 758 2.4 1998 1,172 3.71

1982 736 2.33 1999 1,088 3.45

1983 770 2.44 2000 1,114 3.53

1984 738 2.34 2001 1,098 3.48

1985 685 2.17 2002 1,395 4.42

1986 640 2.03 2003 1,350 4.28

1987 585 1.85 2004 1,385 4.39

1988 624 1.98 2005 1,303 4.13

1989 597 1.89 2006 1,280 4.05

1990 691 2.19 2007 1,116 3.53

1991 698 2.21 2008 1,166 3.69

1992 699 2.21 2009 1,172 3.71

1993 776 2.46 2010 1,155 3.66

1994 797 2.52 2011 1,037 3.28

Total 31,574 100

DATA - OBSERVATIONS

Page 11: Staggered Boards and Firm Value,  Revisited

ALMOST NO TIME-SERIES VARIATION IN 1990-2005

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

0%

10%

20%

30%

40%

50%

60%

70%

Percentage of firms with a staggered board

Page 12: Staggered Boards and Firm Value,  Revisited

VARIATION OF SB IN 1978-20111978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

0%

10%

20%

30%

40%

50%

60%

70%Percentage of firms with a staggered board

Page 13: Staggered Boards and Firm Value,  Revisited

19781980

19821984

19861988

19901992

19941996

19982000

20022004

20062008

20100%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

No SB in 1978No SB in 1990No SB in 2000SB in 1978SB in 1990SB in 2000

Category ##

(2011)

No SB 1978 684 146SB in 1978 195 42

No SB 1990 331 167SB in 1990 502 246

No SB 2000 578 261SB in 2000 891 431

Page 14: Staggered Boards and Firm Value,  Revisited

• Confirm previous cross-sectional results: Negative association between SBs and firm

value.

• Reversed in time-series Controlling for firm fixed effects, association is

positive (levels analysis). Average firm value after staggering up

(down) is higher (lower).

SBS AND FIRM VALUE

Page 15: Staggered Boards and Firm Value,  Revisited

CROSS-SECTIONAL ANALYSIS

Dep. Variable is Q[t] (1) (2) (3) (4) (5)

Period:1978-2011

1978-1989

1990-2000

2001-2011

1995-2002

           Staggered Board[t-1] -0.041** -0.009 -0.073** -0.026 -0.042

(firm cluster) (2.38) (0.51) (2.52) (1.06) (1.17)[no cluster] [4.98] [0.96] [4.33] [1.94] [1.83]

G-Index[t-1] - - - - -0.005          (0.57)

Ln (Assets)[t-1] -0.027*** -0.027*** -0.006 -0.042*** 0.052***

(3.74) (3.33) (0.44) (4.11) (3.24)Delaware Incorporation[t-1] 0.014 0.026 0.016 0.009 -0.010  (0.76) (1.26) (0.49) (0.31) (0.28)ROA[t-1] 5.073*** 2.7*** 5.859*** 5.306*** 5.939***

(32.74) (15.98) (22.75) (24.06) (19.11)CAPX/Assets[t-1] -0.263 -0.251 -0.521 0.227 -1.048**

(1.14) (1.23) (1.22) (0.58) (2.17)R&D/ Sales[t-1] 4.231*** 4.669*** 6.158*** 3.823*** 5.499***

(12.01) (5.19) (10.31) (9.33) (7.17)Industry M&A Volume[t-1] -0.235*** 0.009 -0.137 -0.273*** 0.129

(3.04) (0.10) (0.92) (2.74) (0.85)

N 31,574 8,500 9,617 13,457 5,253Adjusted R-Squared 0.50 0.49 0.57 0.49 0.61

Page 16: Staggered Boards and Firm Value,  Revisited

CROSS-SECTIONAL ANALYSIS: CONTROLLED FOR QDep. Variable is Q[t] (1) (2) (3) (4) (5)

Period:1978-2011

1978-1989

1990-2000

2001-2011

1995-2002

Q[t-1] 0.767*** 0.802*** 0.694*** 0.756*** 0.674***

  (91.25) (39.13) (38.52) (66.69) (32.55)Staggered Board[t-1] -0.008 -0.001 -0.009 -0.010 -0.018

(firm cluster) (1.35) (0.15) (0.69) (1.13) (0.99)[no cluster] [1.40] [0.14] [0.68] [1.06] [1.02]

G-Index[t-1] - - - - 0.000  - - - - (0.06)

Ln (Assets)[t-1] -0.003 -0.007** 0.007 -0.01*** 0.018**

(1.43) (2.36) (1.28) (2.78) (2.27)Delaware Incorporation[t-1] 0.007 -0.009 -0.01 -0.002 -0.001  (0.99) (0.65) (0.98) (0.13) (0.03)ROA[t-1] 0.628*** 0.28*** 1.153*** 0.582*** 1.205***

(9.63) (3.38) (6.94) (5.53) (5.74)CAPX/Assets[t-1] -0.366*** -0.424*** -0.442** -0.606*** -0.75***

(4.16) (4.54) (2.25) (3.48) (3.04)R&D/ Sales[t-1] 0.689*** 1.497*** 1.846*** 0.577*** 1.552***

(5.24) (4.76) (5.54) (3.63) (3.70)Industry M&A Volume[t-1] - -0.156* -0.041 -0.156* 0.136

- (1.87) (0.30) (1.81) (1.11)N 28,464 7,479 8,596 12,389 5,027Adjusted R-Squared 0.779 0.76 0.76 0.77 0.77

Page 17: Staggered Boards and Firm Value,  Revisited

TIME-SERIES ANALYSIS

Dep. Variable is Q[t] (1) (2) (3) (4) (5)

Period:1978-2011

1978-1989

1990-2000

2001-2011

1995-2002

Variables          Staggered Board[t-1] 0.059** 0.034 0.008 0.083** 0.119*

(firm cluster) (2.11) (1.26) (0.11) (2.19) (1.82)[no cluster] [4.65] [2.35] [0.17] [3.43] [2.15]

G-Index[t-1] - - - - -0.005          (0.33)Ln (Assets)[t-1] -0.215*** -0.13*** -0.174*** -0.353*** -0.396***

  (12.01) (4.55) (4.65) (11.04) (8.10)ROA[t-1] 2.939*** 1.316*** 2.79*** 1.705*** 2.071***

  (20.27) (10.5) (11.34) (8.39) (7.74)CAPX/Assets[t-1] 0.102 0.134 -0.686** -0.075 -0.907**

  (0.60) (0.80) (2.36) (0.26) (2.19)R&D/ Sales[t-1] 1.445*** 2.03 3.256*** 0.561 0.423  (2.72) (1.26) (3.41) (0.95) (0.35)Industry M&A Volume[t-1] -0.248*** -0.042 -0.27* -0.15 0.129

(3.59) (0.45) (1.84) (1.56) (0.93)

N 31,574 8,500 9,617 13,457 5,253Adjusted R-Squared 0.71 0.70 0.77 0.77 0.80

Page 18: Staggered Boards and Firm Value,  Revisited

• Confirm previous cross-sectional results: Negative association between SBs and firm

value.

• Reversed in time-series: Controlling for firm fixed effects, association is

positive (levels analysis). Average firm value after staggering up

(down) is higher (lower).

In changes, association is also positive (first difference analysis).

Firm value increases (decreases) after staggering up (down).

SBS AND FIRM VALUE

Page 19: Staggered Boards and Firm Value,  Revisited

FIRST DIFFERENCE ANALYSIS

Dep. Variables: ∆ Q[t, t+1] ∆ Q[t, t+2] ∆ Q[t, t+3] ∆ Q[t, t+4] ∆ Q[t, t+5]

Variables (1) (2) (3) (4) (5)∆ Staggered Board[t-1, t] 0.030** 0.041** 0.061** 0.096*** 0.075**

(2.16) (2.11) (2.37) (3.22) (2.22)∆ Ln(Assets)[t-1, t] -0.292*** -0.554*** -0.719*** -0.768*** -0.784***

(15.35) (21.56) (23.55) (22.50) (20.69)∆ ROA[t-1, t] 2.013*** 1.779*** 1.42*** 1.228*** 1.203***

(22.70) (16.48) (12.69) (10.54) (9.71)∆ CAPX/Assets[t-1, t] -0.221** -0.970*** -1.006*** -1.326*** -1.163***

(1.99) (6.96) (6.94) (8.40) (6.64)∆ R&D/ Sales[t-1, t] -0.683** -0.480 -0.775 -0.833 -1.158*

  (1.97) (1.29) (1.63) (1.56) (1.93)∆ Industry M&A Volume[t-1, t] 0.269*** 0.157*** 0.138*** 0.084 0.179***

(6.07) (3.29) (2.67) (1.52) (2.94)

Sample Period (years)1979-2011

1979-2010

1979-2009

1979-2008

1979-2007

# of firms in regression 2,886 2,766 2,597 2,456 2,311

N 29,166 28,004 25,875 23,860 21,954

Adjusted R-Squared 0.08 0.07 0.07 0.07 0.07

Page 20: Staggered Boards and Firm Value,  Revisited

FIRST DIFFERENCE ANALYSIS – MATCHED SAMPLE

Dep. Variable: ∆ Q[t-1, t] ∆ Q[t-1, t+1] ∆ Q[t-1, t+2] ∆ Q[t-1, t+3] ∆ Q[t-1, t+4]

Variables (1) (2) (3) (4) (5)∆ Staggered Board[t-1, t] 0.036** 0.043** 0.061** 0.097*** 0.082**

(2.54) (2.16) (2.38) (3.08) (2.27)∆ Assets[t-1, t] -0.249*** -0.446*** -0.436*** -0.577*** -0.718***

  (2.92) (3.81) (2.98) (4.05) (4.38)∆ ROA[t-1, t] 2.118*** 1.624*** 1.386** 1.136* 0.667  (6.60) (4.00) (2.45) (1.87) (1.28)∆ CAPX/Assets[t-1, t] -0.64 -0.842 -1.186 -1.561** -1.774**

  (1.39) (1.53) (1.65) (2.12) (2.42)∆ R&D/ Sales[t-1, t] 1.323 5.291 4.693 3.725 1.997  (0.71) (1.58) (1.14) (1.01) (0.57)∆ Industry M&A Volume[t-1,t] -0.415 -0.067 0.016 0.158 -0.144  (1.50) (0.17) (0.05) (0.48) (0.36)

   Sample Period (Years) 

1979-2012

1979-2011

1979-2010

1979-2009

1979-2008

N 1,205 1,146 989 912 830Adjusted R-Squared 0.08 0.06 0.06 0.06 0.07

Page 21: Staggered Boards and Firm Value,  Revisited

• Confirm previous cross-sectional results: Negative association between SBs and firm value.

• Reversed in time-series: Controlling for firm fixed effects, association is

positive (levels analysis). Average firm value after staggering up (down)

is higher (lower).

In changes, association is also positive (first difference analysis).

Firm value increases (decreases) after staggering up (down).

Also, portfolio analysis has a positive alpha

SBS AND FIRM VALUE

Page 22: Staggered Boards and Firm Value,  Revisited

STAGGERING & DE-STAGGERING PORTFOLIO EW RETURNSPortfolio

“6m12” Four Factors Model Three Factors Model  Market Factor Model 

  Long ShortLong - Short Long Short

Long - Short Long Short

Long - Short

Alpha (Monthly)

0.516*

* 0.062 0.416   0.442* -0.016 0.447  0.738*

*

0.141 0.479

(2.04) (0.19) (0.95)   (1.72) (0.05) (1.05)   (2.57)(0.43

) (1.13)Alpha (Annual) 6.37%

0.75%

5.11%   5.43% -0.19% 5.50%  

9.22%

1.71% 5.90%Portfolio

“12m12” Four Factors Model Three Factors Model  Market Factor Model 

  Long ShortLong - Short Long Short

Long - Short Long Short

Long - Short

Alpha (Monthly) 0.529

-0.293

1.235** 0.388 -0.425

1.296*

* 0.581*

-0.25

61.266*

**

(1.54) (1.08) (2.24) (1.13) (1.59) (2.47) (1.85)(0.93

) (2.65)

Alpha (Annual) 6.54%

-3.46%

15.87% 4.76% -4.98%

16.71%

7.20%

-3.03%

16.30%

Portfolio “12m24” Four Factors Model Three Factors Model  Market Factor Model 

  Long ShortLong - Short Long Short

Long - Short Long Short

Long - Short

Alpha (Monthly)

0.401*

* 0.039 0.419   0.292* -0.067 0.407  0.525*

**

0.039 0.461*

(2.30) (0.17) (1.44)   (1.65) (0.31) (1.45)   (2.7)(0.18

) (1.68)Alpha (Annual) 4.92%

0.47%

5.15%   3.56%

-0.80% 4.99%  

6.49%

0.47% 5.67%

Page 23: Staggered Boards and Firm Value,  Revisited

STAGGERING AND DE-STAGGERING PORTFOLIO VW RETURNS

Portfolio “6m12” Four Factors Model Three Factors Model  Market Factor Model 

  Long ShortLong - Short Long Short

Long - Short Long Short

Long - Short

Alpha (Monthly) -0.004

-0.132 0.253   -0.047 -0.171 0.278  

-0.006 -0.123

0.251

(0.01) (0.43) (0.53)   (0.13) (0.56) (0.58)   (0.02) (0.4)(0.51

)

Alpha (Annual)

-0.05%

-1.57%

3.08%   -0.56% -2.03% 3.39%  

-0.07%

-1.47%

3.05%

Portfolio “12m12” Four Factors Model Three Factors Model  Market Factor Model 

  Long ShortLong - Short Long Short

Long - Short Long Short

Long - Short

Alpha (Monthly) 0.231 -0.349

1.363*

* 0.125 -0.398 1.263** 0.232 -0.416 1.34**

(0.58) (1.28) (2.35) (0.34) (1.54) (2.34) (0.68) (1.58)(2.57

)Alpha (Annual) 2.81%

-4.11%

17.64% 1.51% -4.67%

16.25% 2.82% -4.88%

17.32%Portfolio

“12m24” Four Factors Model Three Factors Model  Market Factor Model 

  Long ShortLong - Short Long Short

Long - Short Long Short

Long -

Short

Alpha (Monthly) -0.008

-0.167 0.154   -0.06 -0.129 0.054   0.024 -0.165

0.149

(0.04) (0.69) (0.50)   (0.28) (0.53) (0.17)   (0.12) (0.67)(0.47)

Alpha (Annual)

-0.10%

-1.99%

1.86%   -0.72%

-1.54% 0.65%  

0.29%

-1.96%

1.80%

Page 24: Staggered Boards and Firm Value,  Revisited

24

• How to reconcile time-series with cross-sectional evidence?

Possible explanation is “reverse causality” Having relatively low firm value could

induces some firms to adopt a SB (rather than a SB causing low firm value).

Could explain cross-sectional result that firms with SBs tend to have low firm values.

However, reverse causality cannot explain the time series results, as this analysis shows that firm value tends to go up after the adoption of a SB

WHICH DIRECTION OF CAUSALITY?

Page 25: Staggered Boards and Firm Value,  Revisited

PREDICTING MODELS: STAGGERINGDep. Variable is: Pr (Stagger in period t) Random Effects Cox Proportional

Probit Model Hazard ModelVariables (1) (2)Q[t-1] -0.007*** 0.422***

  (3.84) (7.63)Ln (Assets)[t-1] -0.0003 1.11*

(0.47) (1.69)Delaware Incorporation[t-1] -0.001 0.790**

(0.54) (2.14)ROA[t-1] 0.033* 1.471***

(1.79) (5.05)Capital Expense/Assets[t-1] 0.057** 1.124**

(2.29) (2.45)R&D/ Sales[t-1] -0.071** 0.898

(2.44) (1.54)Industry M&A Volume[t-1] 0.065*** 1.016

(3.21) (0.23)

Percentage Effect (i.e., Economic Significance) -35.1% -57.8%N 15,359 14,535# of firms in regression 1,784 1,651

Page 26: Staggered Boards and Firm Value,  Revisited

PREDICTING MODELS: DE-STAGGERINGDep. Variable is: Pr (De-Stagger

in period t) Random EffectsCox

ProportionalProbit Model Hazard Model

Variables (1) (2)Q[t-1] 0.001 0.856

  (0.68) (1.48)Ln (Assets) [t-1] 0.007*** 1.830***

(12.70) (6.22)Delaware Incorporation[t-1] 0.003 1.021

(1.73) (0.14)ROA[t-1] -0.019 1.049

(1.35) (0.46)Capital Expense/Assets[t-1] -0.031 1.029

(1.45) (0.48)R&D/ Sales[t-1] 0.003 0.993

(0.15) (0.09)Industry M&A Volume[t-1] -0.028 0.956

(1.55) (0.42)

Percentage Effect (i.e., Economic Significance) -6.2% -14.4%N 17,368 13,462# of firms in regression 1,813 1,494

Page 27: Staggered Boards and Firm Value,  Revisited

27

How to interpret positive association of SBs & firm value?

Managerial entrenchment view of SBs

Based on assumption that more shareholder power is always better (to reduce moral hazard)

However, in contexts of high asymmetric information or very noisy market prices, shareholders may not know best

Asymmetric information / adverse selection, rather than moral hazard, may be primary agency problem for some firms

SBs protect directors from shareholder pressure

Avoid myopia and promote long-term value creation

A POSITIVE ACCOUNT

Page 28: Staggered Boards and Firm Value,  Revisited

• Hypothesis: If limited commitment (asymmetric info + adverse selection) is the primary problem (rather than market discipline of the board), then:

• SBs may be more valuable in firms with (i) more intangible assets, firms that are (ii) more innovative, and (iii) more complex firms.

These features make valuation of corporate assets / performance more difficult, especially in the short-term

• Our results confirm this hypothesis:

Value-changes associated with changes in SBs:

Stronger / driven by firms with these features

SBS & FIRM FEATURES

Page 29: Staggered Boards and Firm Value,  Revisited

VALUE OF SBS & ADVERSE SELECTIONDep. Variable is Q[t]

(1) (3) (5) (7)

Staggered Board[t-1] 0.071** 0.073** 0.026 0.034  (2.44) (2.45) (0.68) (1.28)

R&D/ Sales[t-1] 0.395        (0.56)      

Intangible Assets/ Total Assets[t-1]   0.063        (1.64)    

Ranked Patent Citation Count[t-1]     0.035        (0.38)  

Firm Sales[t-1]       -0.24        (0.88)

R&D/ Sales[t-1] *Staggered Board[t-1] 1.962**        (2.54)      

Intangible/Total Assets[t-1]*Staggered Board[t-1]   0.118***    

    (2.86)    Ranked Patent Citations[t-

1]*Staggered Board[t-1]

   0.229*  

      (1.92)  Firm Salest-1] * Staggered Board[t-1]       0.037**

        (2.34)Economic Significance (Staggered B.) 4.49% 4.61% 1.71% 2.34%Economic Significance (Int. Variable) 10.8% 3.96% 4.97% 3.44%N 31,574 31,337 15,338 31,558

Page 30: Staggered Boards and Firm Value,  Revisited

• Hypothesis: If limited commitment (asymmetric info + adverse selection) is the primary problem (rather than market discipline of the board), then:

• SBs may be more valuable in firms with (i) more productive labor, firms with (ii) more contractual imcompleteness (relationality), and firms with (iii) large customers.

• Our results confirm this hypothesis:

Value-changes associated with changes in SBs:

Stronger / driven by firms with these features

FURTHER TESTS OF LIMITED COMMITMENT PROBLEM

Page 31: Staggered Boards and Firm Value,  Revisited

LONG-TERM COMMITMENT HYPOTHESIS

(1) (4) (5)Staggered Board[t-1] 0.0612** -0.0493 -0.249

(2.20) (0.91) (1.45)Staggered Board[t-1] * Labor Productivity[t-1] 0.099***

(3.74)Labor Productivity[t-1] -0.227***

(8.31)Staggered Board[t-1] *Relativity[t-1] 0.362

(1.62)Relativity[t-1] -0.726**

(2.01)

N 30,797 24,880 9,628Adjusted R-Squared 0.740 0.748 0.695

Page 32: Staggered Boards and Firm Value,  Revisited

LONG-TERM COMMITMENT HYPOTHESIS (CONTINUED)

(1) (2) (3) (4)Staggered Board[t-1] 0.043 0.044 0.044 0.047*

(1.45) (1.50) (1.54) (1.66)Staggered Board[t-1]*Large Customer 10%[t-1] 0.073**

(2.38)Large Customer 10%[t-1] -0.085***

(3.26)Staggered Board[t-1]*Large Customer 20%[t-1] 0.090***

(2.69)Large Customer 20%[t-1] -0.093***

(3.62)Staggered Board[t-1]*Large Customer 30%[t-1] 0.125***

(3.34)Large Customer 30%[t-1] -0.131***

(4.81)Staggered Board[t-1]*Large Customer 40%[t-1] 0.149***

(3.53)Large Customer 40%[t-1] -0.131***

(4.33)

N 31,574 31,574 31,574 31,574Adjusted R-Squared 0.715 0.715 0.715 0.715

Page 33: Staggered Boards and Firm Value,  Revisited

• Alternative Hypotheses:(i) Maybe firms with SBs simultaneously decrease other pro-

management governance features and this results in higher value?

(ii) Does having a SB alter the structure and level of executive compensation (increased board capture hypothesis)?

(iii)Does SB changes level of CEO turnover?

• Results:(i) Changes in firm value before versus after the adoption of

a SB independent of the level of shareholder rights at the firm.

(ii) Having a SB produces more efficient executive compensation, for example providing better risk-taking incentives.

(iii)CEO turnover is not different for firms with/without SB.

SBS & OTHER GOVERNANCE FEATURES

Page 34: Staggered Boards and Firm Value,  Revisited

GOVERNANCE PROVISIONS

Dep. Variable is Q[t] (1) (2) (3) (4)Variables:         Staggered Board[t-1] 0.091* 0.133*** 0.077** 0.077**

  (1.94) (2.97) (2.57) (2.58)CEO-Board Chairman Duality[t-1] -0.017 0.036**

   

  (0.58) (1.96)    Governance Index[t-1]     -0.015** -0.013**

      (2.40) (2.44)CEO-Board Chairman Duality[t-1] * Staggered Board[t-1] 0.089*** -    

  (2.81) -    Governance Index[t-1] *Staggered Board[t-1]     0.004 -

      (0.64) -Economic Significance (Staggered B.)

6.26% - 4.86% -

Economic Significance (Int. Variable)

5.10% - 1.28% -

Sample Period (Years) 1996 -2011

- 1978 -2011

-

N 18,552 18,552 23,525 23,525

Adjusted R-2 0.73 0.73 0.71 0.71

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EXECUTIVE COMPENSATION

Dep. Variable is Q[t] (1) (2) (3) (4) (5) (6)Variables:             Staggered Board[t-1] 0.116** 0.120*** 0.127** 0.152*** 0.105** 0.126***

  (2.58) (2.63) (2.54) (3.05) (2.53) (2.85)CEO Delta[t-1] 0.053*** 0.058***        

  (4.66) (7.60)        CEO Vega[t-1]     -0.070 0.026    

      (1.28) (0.58)    CEO Total Compensation[t-1]         0.086*** 0.121***

          (4.29) (8.87)CEO Delta[t-1] * Staggered Board[t-1] 0.008          

  (0.57)          CEO Vega[t-1] * Staggered Board[t-1]     0.199***      

      (2.82)      CEO Total Comp[t-1] * Stagg. Board[t-1]         0.061**  

          (2.44)  Economic Significance (Staggered B.)

6.62% - 7.26% - 5.97% -

Economic Significance (Int. Variable)

1.79% - 5.53% - 5.43% -

Sample Period (Years) 1992 - 2010

- 1992 - 2010

- 1992 - 2011

-

N 17,573 17,573 15,983 15,983 17,965 17,965Adjusted R-2 0.74 0.74 0.73 0.73 0.74 0.74

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CEO TURNOVER

Dependent Variable: 

Prob (Forced

CEO Turnover[t])

Prob(Forced

CEO Turnover[t])

Prob (CEO

Turnover[t])

Prob (CEO

Turnover[t])

  (1) (2) (3) (4)Staggered Board[t] 0.002 0.001 0.001 0.0004

(0.77) (0.45) (0.12) (0.06)Excess Returns [t] -0.021*** -0.02*** -0.044*** -0.042***

(7.23) (3.62) (5.91) (3.74)Staggered Board[t] * Excess Returns[t] - -0.002 - -0.004

- (0.22) - (0.25)Poison Pill[t] 0.004* 0.004* 0.01* 0.01*

(1.88) (1.9) (1.74) (1.75)Delaware Incorporation[t] 0.002 0.002 0.002 0.002

(0.97) (0.97) (0.27) (0.27)         

N 9,519 9,519 9,519 9,519Pseudo R-2 0.04 0.04 0.008 0.008Number of events 164 164 894 894

Sample Period1993-2001

1993-2001

1993-2001

1993-2001

Page 37: Staggered Boards and Firm Value,  Revisited

• Separating SB provisions Charter v. Bylaws.• Around 90% of SB are Charter-

based.• Economic significance is higher.• SB bylaws based (statistically)

insignificant.

• Controlling for M&A activities.

• Other proxies for asymmetric information (e.g., idiosyncratic volatility).

OTHER ROBUSTNESS CHECKS

Page 38: Staggered Boards and Firm Value,  Revisited

38

SB: CHARTER V. BYLAWS

CROSS-SECTIONAL ANALYSISDep. Variable: Q[t]            

Variables (1) (2) (3) (4) (5) (6)Staggered Board[t-1]   -0.007   0.067** -0.049** 0.058*

    (0.36)   (2.20) (2.47) (1.85)Staggered Board – Charter[t-

1] -0.007   0.066**        (0.37)   (2.17)      Staggered Board – Bylaws[t-

1] -0.003 0.004 0.067* 0.000      (0.11) (0.14) (1.89) (0.01)    Pre-1986 Indicator x Staggered Board[t-1]         0.047* 0.004

          (1.65) (0.11)Year fixed effects and other controls of Table 3 included

Yes Yes Yes Yes Yes Yes

N 23,793 23,793 23,793 23,793 23,793 23,793Adjusted R-Squared 0.54 0.54 0.70 0.70 0.54 0.54Firm Fixed Effect No No Yes Yes No YesIndustry Fixed Effect Yes Yes No No Yes No

Page 39: Staggered Boards and Firm Value,  Revisited

39

• We investigate 34 years of SBs data and find that, over time, staggering up (down) is associated with increases (decreases) in firm value.

First, we challenge existing cross-sectional evidence and interpretation on staggered boards

Second, we document that in the time series, staggered boards increase firm value:

(i) SBs valuable to protect commitments to long-term value creation, especially when asymmetric information is important;

(ii) Traditional board-centric model can efficiently serve the interests of shareholders?

CONCLUSIONS

Page 40: Staggered Boards and Firm Value,  Revisited

• Reducing Federal intervention on Corporate Law?

• How constraining managerial moral hazard?

Executive compensation?

Fiduciary duties?

• Bias in shareholder advisory services?

DIRECTIONS FOR FUTURE LEGAL RESEARCH

Page 41: Staggered Boards and Firm Value,  Revisited

Data Checks

Page 42: Staggered Boards and Firm Value,  Revisited

• Hand Collection, 1996-2006– 53 cases of incomplete (late) board classification in

Risk Metrics:

– 128 cases of incomplete (late) board de-classification in Risk Metrics:

DATA CHECKS IN RISK METRICS, 1996-2006

YEAR COUNT1995 41998 102000 152002 122004 92006 3

YEAR COUNT1995 51998 112000 142002 72004 222006 69

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• Examples incomplete classification in Risk Metrics:

DATA CONSISTENCY – RISK METRICS

Company IRRC Date/Year Actual Date Classify

Bed Bath & Beyond 1998 06/27/1997

City National Corp 1998 04/16/1996

Progressive 1998 04/25/1997

Charles Schwab Corp 1998 05/06/1996

Whole Foods Market Inc. 2000 03/30/1998

Harmon Industries Inc. 2000 12/10/1998

Allegheny Energy Inc. 2002 07/15/1999

Qwest Communications 2002 05/02/2001

WM Wrigley Jr Co 2004 08/15/2001

Eagle Materials Inc. 2006 01/08/2004

Page 44: Staggered Boards and Firm Value,  Revisited

• Examples incomplete de-classification in Risk Metrics:

DATA CONSISTENCY – RISK METRICS

Company IRRC Date/Year Actual Date De-Classify

Ameritech Corp 1998 04/17/1996Foamex International Inc.

1998 05/23/1996

Mead Corp 1998 04/25/1996Occidental Petroleum Corp

1998 04/25/1997

Time Warner Inc. 1998 05/15/1997Travelers Group Inc. 1998 04/23/1997Union Pacific Corp 1998 04/19/1996Apple Computer Inc. 2000 03/24/1999Walt Disney Co 2000 02/24/1998Morrison Knudsen Corp

2000 04/18/1998

Smurfit Stone Container

2000 05/27/1999

Home Depot Inc. 2002 05/31/2000Coca Cola Bottling Co 2004 05/07/2003Dow Jones & Co Inc. 2004 04/19/2003Hasbro Inc. 2004 05/14/2013Iomega Corp 2004 05/20/2013Pfizer Inc. 2004 04/24/2003Sprint Corp 2004 05/13/2003Waste Management Inc.

2004 05/17/2002

Allegheny Energy Inc. 2006 05/13/2004AT&T Inc. 2006 04/30/2004Bristol Myers Squibb 2006 05/06/2003Eastman Kodak Co 2006 04/27/2004Fedex Corporation 2006 09/27/2004Host Marriott Corp 2006 05/20/2004Merck & Co 2006 04/27/2004