The effect of entrenched boards on corporate risk-taking: testing the quiet life hypothesis

Abstract

The quiet life hypothesis posits that entrenched managers are well insulated from removal and thus prefer to enjoy a quiet life, i.e. they tend to be less ambitious, avoid difficult decisions and engage in less risk-taking (Bertrand and Mullainathan, 2003). We utilize the staggered board (or classified board) to test this hypothesis. The staggered board is a powerful takeover defence that enables inefficient managers to evade the discipline of the takeover market, thereby exacerbating managerial entrenchment (Bebchuk and Cohen, 2005). We find that managers entrenched by the staggered board adopt significantly less risky strategies, consistent with the quiet life hypothesis. In particular, the presence of a staggered board reduces the volatility of stock returns by 4.46%. We also show that our conclusion is unlikely affected by the presence of endogeneity.

Keywords:

• corporate risk-taking
• staggered boards
• agency theory
• managerial entrenchment

JEL Classification:

• G34
• G30

Acknowledgments

Part of this research was conducted while the third author served as visiting associate professor of finance at Thammasat University, Mahidol University and The National Institute of Development Administration (NIDA) in Bangkok, Thailand.