Capital structure, staggered boards, and firm value

Grounded in agency theory, this study investigates whether staggered boards (in which only a portion of directors are elected at one time) influence capital structure choices. Leverage has been argued and shown to alleviate agency costs. Because staggered boards can entrench inefficient managers, they may motivate managers to adopt a lower level of debt, thereby avoiding the disciplinary mechanisms associated with leverage. The empirical evidence supports this hypothesis, showing that firms with staggered boards are significantly less leveraged than those with unitary boards (in which all board members are elected at one time). The impact of staggered boards on capital structure choices exists both in industrial and regulated firms, although it seems to vanish after enactment of the Sarbanes-Oxley Act of 2002. The results show that staggered boards are likely to bring about, and do not merely reflect, lower leverage. Finally, the results demonstrate no significant adverse impact on firm value as a result of excess leverage.