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Do Classified Boards Deter Takeovers? Evidence from Merger Waves

Published online by Cambridge University Press:  27 March 2023

Kose John ,
Dalida Kadyrzhanova  and
Sangho Lee
Kose John
Affiliation:
New York University Stern School of Business kjohn@stern.nyu.edu
Dalida Kadyrzhanova*
Affiliation:
Federal Reserve Board
Sangho Lee
Affiliation:
California State Polytechnic University, Pomona College of Business Administration sanghol@cpp.edu
*
dalida.kadyrzhanova@frb.gov (corresponding author)
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Abstract

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We exploit the arrival of industry-wide synergistic merger waves to identify whether classified boards deter takeover bids. In a stylized model, we show that when target classified boards are costly to bidders, their negative effect on takeover likelihood should be more pronounced during merger waves. Using a sample of takeover bids in the United States between 1990 and 2016, we find strong evidence supporting this prediction. The results are robust to accounting for the benefits of classified boards and controlling for other antitakeover provisions. Our findings suggest that classified boards effectively reduce a firm’s exposure to the takeover market.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 2 , March 2024 , pp. 759 - 795
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank an anonymous referee and Mara Faccio (the editor) for helpful suggestions. We also thank Anup Agarwal, Yakov Amihud, Jennifer Arlen, Thomas Bates, Lucian Bebchuk, Espen Eckbo, Alicia Davis Evans, Antonio Falato, Michael Fishman, Mariassunta Giannetti, Victoria Ivashina, Ehud Kamar, Pete Kyle, Mike Lemmon, Xuelin Li, Kate Litvak, Vojislav Maksimovic, Rich Mathews, Holger Mueller, Gordon Phillips, Nagpurnanand Prabhala, Avri Ravid, David Robinson, Kelly Shue, David Yermack, and participants at the 2015 All-Georgia Finance Conference, 2014 Ackerman Conference on Corporate Governance, 2017 Finance Down Under Conference, 2016 Financial Intermediation Research Society meeting, 2020 Financial Management Association meeting, 2020 NYU Corporate Governance Luncheon, Clemson University, Exeter University, and University of Bristol for their helpful comments and suggestions. An earlier version of this article circulated under the title “Managerial Entrenchment Waves.” The opinions expressed herein are those of the authors and do not represent those of the Federal Reserve Board or the Federal Reserve System. All remaining errors are ours.

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