The Impact of Classified Boards on Firm Value: The New Evidence

Asian Review of Financial Research, 2012

43 Pages Posted: 22 Aug 2013

See all articles by Seoungpil Ahn

Seoungpil Ahn

Sogang University

Gwangheon Hong

Sogang University

Doseong Kim

Sogang University; University of Akron

Date Written: August 1, 2012

Abstract

This paper reexamines the relation between firm value and classified boards. The previous studies on large-sample data document a negative relation between classified boards and firm value. Event study evidence also shows a positive market response to the elimination of classified boards and a negative announcement effects for the new adoption of classified boards. These results, however, posit a puzzle why then a majority of the U.S. firms maintains this seemingly suboptimal board structure. We attempt to resolve this puzzle. After correcting for the influence of omitted variables and self-selection bias, we find no evidence that such negative relation exists at all. If there is any, we find that classified boards actually enhance firm value. The result explains why classified board structure prevails till recent years. Further, we show that the valuation effect of classified boards is conditional on a firm’s information costs. For firms with high monitoring costs, the market perceives that classified boards hurt firm value. However, for firms whose information problem is less severe, the adoption of classified boards is not viewed as detrimental to firm value. This suggests that there are some firms whose organizational structures do not fit with classified boards even though classified boards are value-enhancing for a majority of firms.

Keywords: Classified Boards, Corporate Governance, Independent Directors, Board, Composition, Information Costs

JEL Classification: G32, G34

Suggested Citation

Ahn, Seoungpil and Hong, Gwangheon and Kim, Doseong, The Impact of Classified Boards on Firm Value: The New Evidence (August 1, 2012). Asian Review of Financial Research, 2012, Available at SSRN: https://ssrn.com/abstract=2314272

Seoungpil Ahn (Contact Author)

Sogang University ( email )

Seoul 121-742
Korea, Republic of (South Korea)

Gwangheon Hong

Sogang University ( email )

35 Baekbeom-ro
Seoul, 121-742
Korea

Doseong Kim

Sogang University ( email )

Seoul
Korea, Republic of (South Korea)
+822-705-8861 (Phone)
+822-705-8119 (Fax)

University of Akron ( email )

259 S. Broadway
Akron, OH 44325
United States

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