Outside Director-Shareholder Agency Conflicts: Evidence from Bank Consolidation
Purpose – Takeovers create a potential conflict of interest between target shareholders and directors. While mergers generally create value for the target shareholders, their directors will typically lose their board seats and likely face a financial loss or loss of prestige. The purpose of this paper is to examine evidence to support or refute that directors may act in their own best interests at the expense of shareholders.
Design/methodology/approach – The authors reason that if directors act in their own best interests, then acquiring firms will seek targets with older board members who are closer to director retirement and are therefore less reluctant to give up their board seats. The paper uses data of 528 banks between 1999 and 2004 to estimate logistic regressions controlling for variables relevant to takeover probability. In the hypotheses, the authors test for the significance of the average director age on a board.
Findings – The paper finds a highly positive significant relation between the average age of a board of directors and the probability of takeover. Furthermore, this variable is more robust and has greater explanatory power in predicting takeover targets than all other financial, ownership and governance variables commonly controlled for and included in this study. This suggests that older directors are less prone to agency problems and more willing to make decisions that will likely result in the loss of their board seat.
Practical implications – These findings have important policy implications on director retirement policies such as director age versus term limits. The results also have implications on the use of director golden parachutes. Finally, the authors highlight a strategic consideration for acquiring firms seeking takeover targets.
Originality/value – This paper is the first, to the best of the authors' knowledge, to document board age as an important governance characteristic.