The Effect of Staggered Boards on Stock Value: New Evidence

Yakov Amihud is Ira Leon Rennert Professor of Entrepreneurial Finance at NYU Stern School of Business. This post is based on a recent paper authored by Professor Amihud and Stoyan Stoyanov of Berkeley Research Group, that responds to an article by Professors Alma Cohen and Charles C.Y. Wang.

Against the lively debate on whether a staggered board (SB) of directors hurts or benefits stockholders I present new evidence suggesting that in general, an SB has no significant effect on stock value. The evidence is based on the effects of two Delaware court rulings in 2010 in the case of Airgas on stock prices of Delaware companies that could be affected by these rulings. The October 8 ruling weakened the potency of the SB for companies that have their annual meeting late in the year and the November 23 decision restored its potency. (A detailed description of these rulings appears in a post on the Forum here.)

If an SB hurts shareholder value, then the first ruling should have raised the stock price of companies that were potentially affected by it and the second ruling should have depressed the stock price of these companies. And, if an SB is beneficial, the effect on stock prices should be the opposite. In my study with Stoyan Stoyanov (forthcoming in the Journal of Financial Economics), available here, we find that the cumulative impact of the two rulings on stock prices was insignificantly different from zero.

Our tests employ three samples of Delaware companies, using the ISS database. One sample includes companies with an SB, divided between those that had their annual meeting late in the year (the affected companies) and those whose annual meeting was early in the year (the benchmark companies). The second sample consists of companies whose annual meeting was late in the year; we compare companies with and without an SB. The third sample is of companies with an SB which we compare to companies without an SB. The idea here is that the market might have viewed the rulings as an indication of Delaware court’s stance towards the potency of an SB. Indeed, press articles during that time reflected such a view. For all three samples, the results are the same: the effects of the two Airgas rulings were quite insignificantly different from zero. (The tests follow the procedure proposed by Alma Cohen and Charles Wang in their 2013 paper on the subject in the Journal of Financial Economics, available here.) The results remain insignificant when we use a broader sample of Delaware companies that excludes companies with penny stocks (price below $1) or with market value below $10 million.

Our result is inconsistent with findings in earlier studies that show significant effects of an SB on firm market-to-book ratio. One study shows a negative such effect and the other shows that the effect is positive. These studies differ in their choice of estimation model. The first study estimates the effect of SB across firms while the second one includes firms fixed effects which control for firm (constant) characteristics. However, studies on the effects of an SB suffer from the problem of endogeneity, which makes it difficult to identify causality: is it that an SB causes low valuation or is it that firms with low value maintain an SB protection, perhaps for fear of being acquired “on the cheap” while they strive to improve their performance. Or, a company’s board may view an SB protection as no longer necessary if its performance improves, leading to a positive correlation between de-staggering and firm value. Given the problem in identifying causality, Alma Cohen and Charles Wang (JFE, 2013) proposed that the two Airgas rulings could be viewed as a natural experiment, enabling to trace the direction of causality from the stock price reaction to these rulings. As stated above, the effects of these rulings on stock prices were quite insignificant. Of course, it could be that the Airgas rulings were an inappropriate natural experiment, or that the power of the test was inadequate.

We further analyzed the effect of board de-staggering events since the year 2000 on firms’ return on assets (ROA) and found that this effect was insignificantly different from zero (employing panel estimation with firm fixed effects). This result is consistent with our result on the insignificant stock price response to the Airgas rulings.

It seems that the value effect of an SB is idiosyncratic. It benefits stockholders in well-managed companies and harms firm value in badly managed ones. It is doubtful that one can make a general statement on the value effect of an SB, as some participants in this debate do.

The full paper is available here.

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