Takeover Bids and Target Directors' Incentives: Retention, Experience and Settling-Up

Abstract

I investigate the nature of the incentives that lead outside directors to serve stockholders' interests. Specifically, I document the effect of a takeover bid on target directors, both in terms of its immediate financial impact and its effect on the number of future board seats held by those target directors. Directors are rarely retained following a completed offer. All target directors hold fewer directorships in the future than a control group, suggesting that the target board seat is difficult to replace. The direct financial impact of a completed merger is predominately negative for outside directors. This documents a cost to outside directors should they fail as monitors, forcing the external control market to act for them. Future seats are related to pre-bid performance. Among directors of poorly-performing firms, those that rebuff an offer are penalized in the directorial labor market, while those who complete the merger fare better. I also find some evidence that less-experienced outside directors gain seats from the experience of the takeover bid.

JEL Classification: G34