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Repealing Classified Boards: What Is the Motivation?
Sharon K. Lee
The Journal of Finance Issues
Given the recent growing concerns of corporate shareholders about governance of public firms, there is a significant increase in the number of firms that have eliminated classified boards. The majority of S&P 500 firms have repealed their classified board over the past decade. Early literature [McWilliams, 1990, Lee (Bojanic) and Officer, 1994] suggest insignificant wealth effects on announcement of relatively less restrictive takeover barriers, such as a classified board. With the sensitive environment of lower confidence over the last ten years, investors appear more concerned with management entrenchment problems which could lead to poorly performing firms. This is one motivation for the significant increase in eliminations of classified board provisions. Another related motivation for eliminating the classified board is the requirement of higher levels of independence on corporate boards. This study updates the evidence on the motivation of firms eliminating the classified board in two different years of study: 2004 and 2009 in an attempt to determine reasons behind eliminating an antitakeover provision once viewed as benign.