Simone M. Sepe

Staggered Boards and Firm Value, Revisited

This paper revisits the association between firm value (as proxied by Tobins Q) and whether the firm has a staggered board. As is well known, in the cross-section firms with a staggered board tend to have a lower value. Using a comprehensive sample for 1978-2011, we show an opposite result in the time series: firms that adopt a staggered board increase in firm value, while de-staggering is associated with a decrease in firm value. We further show that the decision to adopt a staggered board seems endogenous, and related to an ex ante lower firm value, which helps reconciling the existing cross-sectional results to our novel time series results. To explain our new results, we explore potential incentive problems in the shareholder-manager relationship. Short-term oriented shareholders may generate myopic incentives for the firm to underinvest in risky long-term projects. In this case, a staggered board may helpfully insulate the board from opportunistic shareholder pressure. Consistent with this, we find that the adoption of a staggered board has a stronger positive association with firm value for firms where such incentive problems are likely more severe: firms with more R&D, more intangible assets, more innovative and larger and thus likely more complex firms.

Lawyers and Fools : Lawyer-Directors in Public Corporations

The accepted wisdom — that a lawyer who becomes a corporate director has a fool for a client — is outdated. The benefits of lawyer-directors in today’s world significantly outweigh the costs. Beyond monitoring, they help manage litigation and regulation, as well as structure compensation to align CEO and shareholder interests. The results have been an average 9.5 percent increase in firm value and an almost doubling in the percentage of public companies with lawyer-directors. This Article is the first to analyze the rise of lawyer-directors. It makes a variety of other empirical contributions, each of which is statistically significant and large in magnitude. First, it explains why the number of lawyer-directors has increased. Among other reasons, businesses subject to greater litigation and regulation, and firms with significant intangible assets (such as patents) value a lawyer-director’s expertise. Second, this Article describes the impact of lawyer-directors on corporate monitoring. Among other results, it shows that lawyer-directors are more likely to favor a board structure and takeover defenses that reduce shareholder value — balanced, however, by the benefits of lawyer-directors, such as the valuable advice they can provide. Finally, this Article analyzes the significant reduction in risk-taking and the increase in firm value that results from having a lawyer on the board. Our findings fly in the face of requirements that focus on director independence. Our results show that board composition — and the training, skills, and experience that directors bring to managing a business — can be as or more valuable to the firm and its shareholders.

Shadow Pills and Long-Term Firm Value

This paper analyzes the value impact of the right to adopt a poison pill – or “shadow pill” – on long-term firm value, exploiting the natural experiment provided by the staggered adoption of poison pill laws that validated the use of the pill in 35 U.S. states over the period 1986 to 2009. We document that the availability of a shadow pill results in an economically and statistically significant increase in firm value, especially for firms more engaged in innovation or with stronger stakeholder relationships. Our findings are robust to different specifications, including matching and portfolio analysis, and provide support to the bonding hypothesis of takeover defenses.We analyze the impact of the right to adopt a poison pill – a “shadow pill” – on pill policy and firm value by exploiting the quasi-natural experiment provided by U.S. states’ staggered adoption of poison pill laws that validate the pill. We document that a strengthened shadow pill promotes the use of actual poison pills and increases firm value – especially for more innovative firms or firms with stronger stakeholder relationships, and for hostile acquisition targets. Our findings suggest shadow pills create value for some firms by reducing their contracting costs with stakeholders and increasing their bargaining power in takeovers.

Board Declassification Activism: Why Run Away from the Evidence?

In a recently released paper, “Board Declassification Activism: The Financial Value of the Shareholder Rights Projects,” we investigated the effects on firm value of board declassifications promoted by the Shareholder Rights Project (SRP), a clinical program held at Harvard Law School for three academic years (2011-2014). Consistent with the results we obtained in our prior published work on staggered boards, we find a negative effect of SRP declassifications on firm value, both in absolute terms and relative to declassifications occurring at firms that were not targeted by the SRP over the same period. Economically, the negative effect of SRP declassifications corresponds to an average decline in financial value in the range of

Disentangling liberalization and privatization policies: Is there a political trade-off?

0.96 -

The Shareholder Value of Empowered Boards

1.6 billion per declassifying SRP target or, aggregated across the 93 SRP-declassifications included in our sample, an overall loss in the range of

Staggered Boards and Long-Term Firm Value, Revisited

90 -

Private Sale of Corporate Control: Why the European Mandatory Bid Rule is Inefficient

149 billion. In a response note, Lucian Bebchuk and Alma Cohen “contest” our results, arguing that they do not provide a basis for opposing board declassification, when appropriately interpreted. This reply responds to the Bebchuk-Cohen critique. We show that not only their critique is unwarranted, but also fails to engage with our main finding that the plausibly exogenous shock caused by the SRP’s declassification activism was followed by substantial declines in firm value.