Relationships between board structure and takeover defenses

Purpose – As corporations continue to face substantial information asymmetries between managers and shareholders, they must decide how to mitigate this agency problem using various mechanisms of corporate governance. Two of these mechanisms include the board of directors and takeover defenses. The purpose of this paper is to show that rather than having an additive effect, the marginal benefit of using one of these mechanisms declines as the use of the other increases. Design/methodology/approach – Using a governance index that measures the firm's takeover defenses and a unique board of directors index, the study employs both univariate analyses and multivariate simultaneous equation modeling in order to test the hypotheses. Findings – The results of these tests show that these two measures of corporate governance should be viewed as a set rather than as individual components. In other words, a strong board is inversely related to strong shareholder protection in the form of takeover defenses. The study further analyzes the extent to which growth opportunities influence this relationship using a logistic regression approach. It appears that a firm's opportunity for growth is related to the strength of its board of directors, yet not to its governance provisions. Originality/value – By analyzing a specific combination of current corporate governance practices, these results can assist firms at a practical level by providing information on optimal solutions to the agency problem.