Classified Boards, the Cost of Debt, and Firm Performance

Abstract

This paper documents that classified boards substantially reduce the cost of debt. The evidence is not consistent with the argument that bondholders benefit from board classification because they are concerned about hostile takeovers. Instead, the results suggest that weak shareholder rights in the form of classified boards reduce managerial risk-taking, and the lessened concern for takeovers also increases managerial incentive for financial disclosure, with both effects inuring to bondholders’ benefit. Under the circumstances that the agency conflict between shareholders and bondholders is severe, classified boards are benign to firm performance, despite their adverse impact on performance otherwise.