Classified boards, the cost of debt, and firm performance

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 the lessened concern for takeovers associated with a classified board structure reduces managerial risk-taking, and increases managerial incentive for financial disclosure, with both effects inuring to bondholders' benefit. Consistent with prior literature, classified boards on average are associated with a lower firm performance. However, under the circumstances that the agency conflict between shareholders and bondholders is severe, the performance effect of classified boards appears benign.

► Classified boards are strongly associated with a lower cost of debt. ► This may not be attributable to the concerns of bondholders for takeovers. ► Managerial risk-aversion due to less concern for takeovers may explain this. ► Better financial disclosure induced by less concern for takeovers may explain this. ► Classified boards are benign to performance under certain scenarios.