This paper is a survey of the literature on boards of directors, with an emphasis on research done subsequent to the Benjamin E. Hermalin and Michael S. Weisbach (2003) survey. The two questions most asked about boards are what determines their makeup and what determines their actions? These questions are fundamentally intertwined, which complicates the study of boards because makeup and actions are jointly endogenous. A focus of this survey is how the literature, theoretical as well as empirical, deals—or on occasions fails to deal—with this complication. We suggest that many studies of boards can best be interpreted as joint statements about both the director-selection process and the effect of board composition on board actions and firm performance. ( JEL G34, L25)

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The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey

We examine whether corporate governance mechanisms, especially the market for corporate control, affect the profitability of firm acquisitions. We find that acquirers with more anti-takeover provisions experience significantly lower announcement-period stock returns than other acquirers. We also find that acquiring firms operating in more competitive industries or separating the positions of CEO and chairman of the board experience higher abnormal announcement returns. Our results support the hypothesis that managers protected by more anti-takeover provisions face weaker discipline from the market for corporate control and thus, are more likely to indulge in empire-building acquisitions that destroy shareholder value. They provide a partial explanation for why anti-takeover provision indices of Gompers, Ishii and Metrick and others are negatively correlated with shareholder value.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID927761_code528147.pdf?abstractid=697501&mirid=1&type=2

Corporate Governance and Acquirer Returns

The empirical research examining the association between typical measures of corporate governance and various accounting and economic outcomes has not produced a consistent set of results. We believe that these mixed results are partially attributable to the difficulty in generating reliable and valid measures for the complex construct that is termed corporate governance. Using a sample of 2,106 firms and 39 structural measures of corporate governance (e.g., board characteristics, stock ownership, institutional ownership, activist stock ownership, existence of debt-holders, mix of executive compensation, and anti-takeover variables), our exploratory principal component analysis suggests that there are 14 dimensions to corporate governance. We find that these indices have a mixed association with abnormal accruals, little relation to accounting restatements, but some ability to explain future operating performance and future excess stock returns.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID976566_code171605.pdf?abstractid=976566&rulid=1903&mirid=1

Corporate Governance, Accounting Outcomes, and Organizational Performance

We investigate how the market for corporate control (external governance) and shareholder activism (internal governance) interact. A portfolio that buys firms with the highest level of takeover vulnerability and shorts firms with the lowest level of takeover vulnerability generates an annualized abnormal return of 10 - 15% only when public pension fund (blockholder) ownership is high as well. A similar portfolio created to capture the importance of internal governance generates annualized abnormal returns of 8%, though only in the presence of high vulnerability to takeovers. Further, we show that the complementary relation exists for firms with lower industry-adjusted leverage and is stronger for smaller firms. The complementary relation is confirmed using accounting measures of profitability. Using data on acquisitions, firm level Q's and accounting performance, we explore possible interpretations, providing preliminary evidence for a risk effect as well.

Governance Mechanisms and Equity Prices

We examine whether corporate governance mechanisms, especially the market for corporate control, affect the profitability of firm acquisitions. We find that acquirers with more antitakeover provisions experience significantly lower announcementperiod abnormal stock returns. This supports the hypothesis that managers at firms protected by more antitakeover provisions are less subject to the disciplinary power of the market for corporate control and thus are more likely to indulge in empire-building acquisitions that destroy shareholder value. We also find that acquirers operating in more competitive industries or separating the positions of CEO and chairman of the board experience higher abnormal announcement returns. FOLLOWING A STRING OF CORPORATE SCANDALS in the United States, legislators and regulators rushed to enact corporate governance reforms, which resulted in the passage of the Sarbanes-Oxley Act of 2002. Yet, these reforms were instituted with little scientific evidence to support their purported benefits. As the impact of these reforms continues to be strongly felt, with further reforms likely in the future, it is of great economic import to understand how major corporate governance mechanisms affect shareholder wealth. A series of recent studies by Gompers, Ishii, and Metrick (GIM, 2003), Bebchuk, Cohen, and Ferrell (BCF, 2004), Bebchuk and Cohen (2005), and Cremers and Nair (2005) examine one important dimension of corporate governance, namely, the market for corporate control. They document negative relations between various indices of antitakeover provisions (ATPs) and both firm value and

https://onlinelibrary.wiley.com/doi/pdf/10.1111/j.1540-6261.2007.01259.x

Corporations, Corporate Law, and Networks of Contracts

This article focuses on the widely held views that antitakeover charter and bylaw provisions (ATPs) increase agency costs, thereby reducing firm value, but that firms going public minimize agency costs, thereby maximizing firm value. We show that these views cannot comfortably coexist: ATPs are common in a sample of IPO-stage charters and are no less common when the firm is backed by venture capitalists or leveraged buyout funds. Moreover, ATP use is not explained by two efficiency explanations of ATP use with theoretical support--target firms' need for bargaining power when a bid is made and the threat of managerial myopia. Rather, we find evidence that antitakeover protection is used to protect management when takeovers are most likely and management performance most transparent. We find no evidence, however, that ATPs are explained by managers' desire to protect unusually high private benefits. Copyright 2001 by Oxford University Press.

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Do IPO Charters Maximize Firm Value? Antitakeover Protection in IPOs

This Article presents a theoretical, institutional, and empirical analysis of how increasing returns -- specifically, learning externalities and network externalities -- influence standardization, customization, and innovation in corporate contracts. In the theoretical section, we analyze how common use of a contract term can create learning and network externalities; how these externalities can influence the balance of standardization, customization, and innovation in contracts; and how such externalities can lead to suboptimal contract provisions. We also discuss how internal learning and network effects can result in switching costs. Finally, we examine how underwriters and law firms may ameliorate some the potential adverse effects of learning and network externalities. In the empirical section, we analyze the evolution of event risk covenants, commonly included in bond indentures in the late 1980s. We find moderate to strong support for the hypothesis that learning or network externalities as well as switching costs were present in these covenants and that underwriters significantly influenced firms' contracting choices.

Standardization and Innovation in Corporate Contracting (or 'the Economics of Boilerplate')

Outside directors can fail to do a good job, sometimes spectacularly. Yet outside directors of U.S. public companies who fail to meet what we call their "vigilance duties" under corporate, securities, bankruptcy, environmental, and other laws almost never face personal liability. This paper describes the almost impenetrable windows within which outside directors may be personally liable for good faith conduct. The principal liability window is under securities law, for a seriously rich (hence worth chasing) director of an insolvent company, where damages exceed the DO barely open under securities law, but only if the firm is bankrupt -maps poorly (we argue) onto the policy factors that should inform director liability. We therefore consider whether the right policy move is toward greater liability of outside directors under corporate law, less liability under securities law, or some of both. We conclude that neither move will make a large difference in practice, given the mediating effects of insurance, indemnification, and settlement incentives. In a companion paper, Bernard Black & Brian Cheffins, Outside Director Liability and Reputational Sanctions Across Countries, we argue that a barely open liability window is likely to be a stable solution, both politically and in the D&O insurance market, and that a barely open window may strike a sensible balance between wanting directors to be aware of potential liability while wanting good candidates to neither avoid becoming directors nor to be overly risk-averse. The details of the window's shape may have only a second-order effect on director behavior.

Michael Klausner

Papers

Corporations, Corporate Law, and Networks of Contracts

Do IPO Charters Maximize Firm Value? Antitakeover Protection in IPOs

Standardization and Innovation in Corporate Contracting (or 'the Economics of Boilerplate')

Outside director liability

Standardization and Innovation in Corporate Contracting (Or "The Economics of Boilerplate")