The Impact of Classified Boards on Firm Value: The New Evidence

This paper reexamines the relation between firm value and classified boards. The previous studies on large-sample data document a negative relation between classified boards and firm value. Event study evidence also shows a positive market response to the elimination of classified boards and a negative announcement effect for the new adoption of classified boards. These results, however, posit a puzzle why then a majority of the U.S. firms maintains this seemingly suboptimal board structure. We attempt to resolve this puzzle. After correcting for the influence of omitted variables and self-selection bias, we find no evidence that such negative relation exists at all. If there is any, we find that classified boards actually enhance firm value. The result explains why classified board structure prevails till recent years. Further, we show that the valuation effect of classified boards is conditional on a firm’s information costs. For firms with high monitoring costs, the market perceives that classified boards hurt firm value. However, for firms whose information problem is less severe, the adoption of classified boards is not viewed as detrimental to firm value. This suggests that there are some firms whose organizational structures do not fit with classified boards even though classified boards are value-enhancing for a majority of firms.