Does Board Tenure Matter?

• In Event: Board Characteristics

Abstract

Long-serving boards can offer the benefit of insights into the firm (the ‘knowledge effect’), but come at the cost of entrenchment (the ‘entrenchment effect’). I find that average board tenure exhibits an inverted U-shaped relationship with corporate performance and is non-monotonic vis à vis various corporate policies. In particular, it bears an inverted U-shaped relationship with stock returns that accompany acquisition announcement, and a U-shaped relationship with abnormal CEO compensation and the opportunistic timing of director option grants, together with the likelihood of making sub-optimal investment decisions and of a pattern of persistence in strategic direction. I address the issue of potential endogeneity of board tenure with firm fixed effect as well as instrumental variable specification. I also use sudden death of independent director as an experiment and show that sudden death that moves board tenure away from the optimal attracts a 2-day announcement return of -0.77%, while those that move board tenure closer to the optimal attract an announcement return of 0.78%. My results are consistent with the notion that for an additional year of tenure, the learning effects prevail within ‘younger’ boards, while entrenchment costs dominate for ‘older’ boards.

Author

• Sterling Huang, INSEAD