Board classification and shareholder value : evidence from corporate law amendments



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This study examines the shareholder value impact of board classification. A classified board typically consists of three classes of directors who serve staggered three-year terms; by contrast, directors of a declassified board are elected annually. Prior studies find a negative correlation between classified boards and shareholder value, but do not establish causality. 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.