Zombie board: Board tenure and firm performance

• Main Authors: HUANG, Sterling, HILARY, Gilles
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2018
• Subjects: Board tenure; Corporate policies; Entrenchment; Firm value; Learning; Accounting; Business Law, Public Responsibility, and Ethics
• Online Access: https://ink.library.smu.edu.sg/soa_research/1728; https://ink.library.smu.edu.sg/context/soa_research/article/2755/viewcontent/HUANG_et_al_2018_ZombieBoard_JAR_av.pdf
• Institution: Singapore Management University

We show that board tenure exhibits an inverted U-shaped relation with firm value and accounting performance. The quality of corporate decisions, such as M&A, financial reporting quality, and CEO compensation, also has a quadratic relation with board tenure. Our results are consistent with the interpretation that directors’ on-the-job learning improves firm value up to a threshold, at which point entrenchment dominates and firm performance suffers. To address endogeneity concerns, we use a sample of firms in which an outside director suffered a sudden death, and find that sudden deaths that move board tenure away from (toward) the empirically observed optimum level in the cross-section are associated with negative (positive) announcement returns. The quality of corporate decisions also follows an inverted U-shaped pattern in a sample of firms affected by the death of a director.