491. Lucian Bebchuk, Alma Cohen & Allen Ferrell, What Matters in Corporate Governance?, 09/2004. subsequently published in Review of Financial Studies, Vol. 22, No. 2, 2009, 783-827
We investigate which provisions, among a set of twenty-four governance provisions
followed by the Institutional Investors Research Center (IRRC), are correlated with firm value
and stockholder returns. Based on this analysis, we put forward an entrenchment index based on
six provisions – four “constitutional” provisions that prevent a majority of shareholders from
having their way (staggered boards, limits to shareholder bylaw amendments, supermajority
requirements for mergers, and supermajority requirements for charter amendments), and two“takeover readiness” provisions that boards put in place to be ready for a hostile takeover (poison
pills and golden parachutes). We find that increases in the level of this index are monotonically
associated with economically significant reductions in firm valuation, as measured by Tobin’s Q.
We also find that firms with higher level of the entrenchment index were associated with large
negative abnormal returns during the 1990-2003 period. Furthermore, we find that the provisions
in our entrenchment index fully drive the correlation, identified by prior work, that the IRRC
provisions in the aggregate have with reduced firm value and lower stock returns during the
1990s. We find no evidence that the other eighteen IRRC provisions are negatively correlated with either firm value or stock returns during the 1990-2003 period.