Impact of Classified Board on M&A Target Shareholder Value: Nurturing Innovation through Entrenchment

• Author: Chaehyun Kim,Hyeongsop Shim,Shinwoo Kang
• Date: 01 March 2020
• Published date: 01 March 2020
• DOI: http://doi.org/10.1111/irfi.12205

Impact of Classified Board on M&A

Target Shareholder Value:

Nurturing Innovation through

Entrenchment*

CHAEHYUN KIM

†

,SHINWOO KANG

‡

AND HYEONGSOP SHIM

§

†

Management Engineering at School of Business Administration, Ulsan National

Institute of Science and Technology, Ulsan, South Korea

‡

School of Business, Sejong University, Seoul, South Korea and

§

College of Business & Economics, Gachon University, Seongnam, South Korea

ABSTRACT

We find that classified board in the M&A target firm is positively related to the

target shareholder value, but only for firmswithbothintensiveR&Dinvest-

ment and strong external governance. We also find that firms with classified

board exhibit superior quality innovation when they have both intensive R&D

investment and strong external governance. These findings are consistent with

the view that classified board provides long-term perspectives that promote pro-

ductive but risky R&D investment, which is highly valued in M&A. Our find-

ings are distinct from the view expressedinextantliteraturethatclassified

board enhances target shareholder value because of stronger bargaining power.

JEL Codes: G30; G34; K22

Accepted: 10 May 2018

I. INTRODUCTION

It is a long-standing debate whether a classified board is beneficial or deleterious

to target shareholders in mergers and acquisitions. While its opponents argue

that the managerial entrenchment effect engendered by the delay in replacing

underperforming management may lead to a fall in target shareholder value,

recent studies suggest a neutral or even positive effect. The main argument for

its positive effect is that the stronger bargaining power arising from the protec-

tion of target boards and managers helps fend off opportunistic bids and results

in higher valuation from acquirers. A different strand of research provides

* Chaehyun Kim acknowledges financial support from Global Ph.D. Fellowship Program through

the National Research Foundation of Korea (NRF) funded by the Ministry of Education

(2015H1A2A1034386) and Human Resources Program in Energy Technology through the Korea

Institute of Energy Technology Evaluation and Planning (KETEP) funded by the Ministry of Trade,

Industry & Energy (20164010201030).

© 2018 International Review of Finance Ltd. 2018

International Review of Finance, 20:1, 2020: pp. 261–273

DOI: 10.1111/irfi.12205