Substitutes or complements? Co-opted boards and antitakeover provisions

ABSTRACT

We examine the relationship between co-opted boards and the adoption of antitakeover provisions (ATPs). Prior studies suggest that co-opted directors appointed after the current CEO assumes office provide weak monitoring. Consistent with the substitution view, we find that firms with greater co-option on the board adopt fewer ATPs. This result suggests that co-opted boards enable CEOs to pursue less additional entrenchment, thereby reducing the adoption of ATPs. Importantly, we find that co-opted boards explain the degree of ATPs beyond the traditional measure of board monitoring effectiveness, and even independent directors are associated with fewer ATPs once they are captured by CEOs.

KEYWORDS:

• Co-opted boards
• co-option
• board monitoring effectiveness
• antitakeover provisions

JEL CLASSIFICATION:

• G30
• G34

Acknowledgments

Junyoup Lee appreciates the support by “Human Resources Program in Energy Technology” of the Korea Institute of Energy Technology Evaluation and Planning (KETEP), granted financial resource from the Ministry of Trade, Industry & Energy, Republic of Korea (No. 20184010201680).

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ There are three major U.S. financial securities markets: the New York Stock Exchange (NYSE), NASDAQ stock market (NASDAQ), and American Stock Exchange (AMEX). The NYSE is the world’s largest stock exchange in terms of the market capitalization of its listed companies, at $22.9 trillion in 2019, and lists approximately 2,400 firms. The NASDAQ is ranked second and lists approximately 3,500 firms. In 2016, the NASDAQ earned $272 million in listing-related revenues. Unlike the NYSE and NASDAQ, AMEX focuses on exchange-traded funds.

² Our data ends in 2007 due to the availability of the data on the ATP variables in the ISS database. We create the E-index based on the old IRRC-methodology data (the Legacy version) because ISS changed its data collection methodology in 2007 after acquiring the IRRC in 2005.

³ Our main results remain qualitatively similar if we modify the GIM index (Gompers, Ishii, and Metrick 2003) by excluding the six state laws and use it as a measure of ATPs.

⁴ Prior to 2006, ISS published information on ATPs every other year. We follow Bebchuk, Cohen, and Ferrell (2009) and adopt the prior year’s value to complete the missing data for some firm-years.

⁵ The data on board co-option are available at Lalitha Naveen’s personal website, https://sites.temple.edu/lnaveen/data/.

⁶ We thank a referee for suggesting this model.

⁷ Some institutions adopt blanket policies to always vote against certain ATPs.

⁸ We use one-to-one nearest-neighbor matching with replacement. In unreported tests, we perform diagnostic tests following Dhaliwal et al. (2016), and our matching procedure is successful. We report only the PSM regression results for brevity.

⁹ We require that each firm in the DiD tests have at least three observations before and after 2001, reducing the number of observations to 7,291.