Classified Boards, the Cost of Debt, and Firm Performance

Abstract

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Does Board Independence Reduce the Cost of Debt?

“…We do not control for governance variables in our primary analysis to preserve the sample sizes. In unreported robustness checks, we control for a number of governance variables following the literature including compensation vega and delta (Shaw, ), board size (Anderson et al., ), institutional and block holdings (Bhojraj and Sengupta, ; Cremers et al., ), the G‐index (Klock et al., ), the L‐index (Bradley and Chen, ), and the classified board dummy (Chen, ). The results are similar except for those with respect to the interest coverage ratio.…”

The Effect of Board Classification in the Restaurant Industry

“…Financial leverage (DEBT) interacted with CB, and this also showed a positive coefficient, even though the magnitude was smaller than DEBT. Chen (2012) and Harford, Li, et al (2008) verified that classified boards reduce the cost of debt by enhancing capabilities against opportunistic bids. Our study found this to be true also in the case of the restaurant industry.…”

“…Therefore, the board of directors is not annually elected under the classified board, even though the election of directors is a primary way for shareholders to take part in a corporate event (Bebchuk & Cohen, 2005;Chen, 2012). Agency theory is widely used to build the theoretical foundation of board classification.…”

“…Under board classification, the board of directors can allow shareholders limited access to information (Bates et al, 2008;Chen, 2012;Harford, Mansi, & Maxwell, 2008). This limited access to information gives rise to increased uncertainty for shareholders and, therefore, perceived riskier conditions (Ertimur, Ferri, & Stubben, 2010;Huang, Lai, & Wen, 2008;Jensen, 1986;Kusnadi, 2011).…”

“…Scholars found that more difficulty in monitoring by the classified board accounts for destruction of a firm's value (John & Senbet, 1998;Chen, 2012). That is, a classified board is less likely to maximize shareholders' benefits.…”