Board Classification and Shareholder Value: Evidence from Corporate Law Amendments

• In Event: Structure and Functioning of Corporate Boards

Abstract

This study examines the shareholder value impact of board classification. Prior studies find a negative correlation between classified boards and shareholder value, but do not establish causality. A concern is that this negative association can be interpreted as either a negative shareholder value effect of classified boards or an equilibrium corporate governance phenomenon, resulting in contradictory policy implications. This study contributes direct and causal evidence using a natural experiment based on corporate law amendments that impose a board classification change. The market reaction surrounding legislative events identifies a perceived shareholder value change caused by the prospect of an exogenous shift in board classification. The results suggest that the market perceives classified boards as reducing shareholder value and declassified boards as improving it. This evidence is consistent with shareholder activists’ argument that board declassification benefits shareholders.

Author

• Daehyun Kim, The University of Texas at Austin