Capital Structure, Staggered Boards, and Firm Value

Grounded in agency theory, this study investigates whether staggered boards (in which only a portion of directors are elected at one time) influence capital structure choices. Leverage has been argued and shown to alleviate agency costs. Because staggered boards can entrench inefficient managers, they may motivate managers to adopt a lower level of debt, thereby avoiding the disciplinary mechanisms associated with leverage. The empirical evidence supports this hypothesis, showing that firms with a staggered board are significantly less leveraged than those with unitary boards (in which all board members are elected at one time). The impact of staggered boards on capital structure choices exists both in industrial and regulated firms although it seems to vanish after enactment of the Sarbanes–Oxley Act of 2002. The results show that staggered boards are likely to bring about, and do not merely reflect, lower leverage. Finally, the results demonstrate no significant adverse impact on firm value as a result of excess leverage. Motivated by agency theory, we examine whether staggered boards (in which only a portion of directors are elected at one time) influence capital structure choices. Leverage has been argued and shown to alleviate agency costs. Because staggered boards can entrench inefficient managers, they may motivate managers to adopt a lower level of debt, thereby avoiding the disciplinary mechanisms associated with leverage. The empirical evidence supports this hypothesis; it shows that firms with a staggered board are significantly less leveraged than those with a unitary board (in which all board members are elected at one time). The evidence is robust even after controlling for a large number of firm characteristics. In addition, we controlled for the other provisions in the Governance Index. The impact of staggered boards is several times larger than the effect of the other governance provisions combined. Our results offer an interesting contrast to those in other studies of the Governance Index. This index, which measures the strength of shareholder rights and includes staggered boards as 1 of 24 elements, awards points for elements not in the interest of shareholders. Other studies have found the index to be positively associated with leverage. We found in this study, however, that staggered boards are associated with lower leverage. Our results are consistent with studies reporting that the effect of staggered boards on firm value is many times larger than the effect of the other Governance Index provisions put together. We also found that the impact of staggered boards on capital structure choices exists both in industrial and regulated firms, although it seems to vanish after the enactment of the Sarbanes–Oxley Act of 2002. Cognizant of possible endogeneity, we tested for causality and found that staggered boards are likely to bring about, not merely reflect, lower leverage. Finally, we explored whether firm value is affected by abnormal leverage that can be attributed to the presence of staggered boards. The results demonstrate no significant adverse impact on firm value because of excess leverage.