Paper Spotlight: Staggered Boards and the Value of Voting Rights

Mahdi Mohseni

Oğuzhan Karakaş

Do staggered (or classified) boards harm shareholder value through entrenchment or help through stability? In a forthcoming RCFS paper, “Staggered Boards and the Value of Voting Rights,” Oğuzhan Karakaş and Mahdi Mohseni revisit this question by using a novel methodology and provide causal evidence on the entrenchment view of staggered boards. Existence of staggered boards, where only a fraction of board members is up for election in a year, has been argued to be an effective and prevalent antitakeover measure for public corporations. Analyzing the impact of staggered boards on the value of shareholder voting rights (i.e., the voting premium), this paper shows that firms with staggered boards have higher voting premiums. Authors estimate the voting premium as the price difference between the stock (i.e., voting share) and the nonvoting share that is synthesized using options, normalized by the stock price. The study reports, for example, firms destaggering their boards have a 65% decrease in their voting premium, while firms staggering their boards experience a 169% increase in their voting premium. Moreover, exploiting plausibly exogenous court rulings, the paper finds that weakening of the staggered firms leads to lower voting premiums, providing strong corroborating evidence on a causal effect. Authors argue that these findings are consistent with the entrenchment view of staggered boards, as the voting premium reflects private benefits of control and inefficiencies in managing firms. It is interesting and important to note, however, that the documented entrenchment effect varies across firms, more pronounced on mature firms and those in noncompetitive industries. Hence, one should be cautious about “one-size-fits-all” approach toward staggered boards.

Spotlight by Isil Erel
Photos courtesy of
Oğuzhan Karakaş and Mahdi Mohseni
First published April 30, 2021

Paper Spotlight: Effect of the Equity Capital Ratio on the Relationship between Competition and Bank Risk-Taking Behavior

Jia Hao

Kuncheng Zheng

Risk taking by banks has been discussed extensively by researchers and policy makers for many years, even preceding the Great Recession. Literature has focused on two mechanisms that alter banks’ risk-taking behavior: higher regulatory capital ratios and higher competition due to bank deregulation. But, how does a bank’s equity capital ratio interact with banking competition in their impact on risk taking? In a forthcoming RCFS paper, “Effect of the Equity Capital Ratio on the Relationship between Competition and Bank Risk-Taking Behavior,” Jia Hao and  Kuncheng Zheng explore the answer to this important question and provide interesting findings. While competition in the banking market mitigates banks’ risk-taking behavior on average, banks’ ex- ante equity capital ratio can alter this relationship. Authors show that increased competition leads to relatively larger reductions in risk taking–especially in their lending portfolios–only by banks with low ex-ante equity capital ratios. This difference between high- and low-capital banks in risk-taking behavior cannot be explained by pre-existing trends, geographical location, or other bank characteristics, such as size, that may influence bank risk-taking. Overall, this paper shows us that a bank’s capital ratio has not only a direct effect but also an indirect effect on its risk taking. Therefore, this indirect effect should be considered in using capital requirements to mitigate risk taking by banks.

Spotlight by Isil Erel
Photos courtesy of
 Jia Hao and  Kuncheng Zheng



Editorial Team Changes

We are pleased to share that Andrew Ellul has been renewed for another 3-year term as Executive Editor and Isil Erel has been renewed for a second term as an editor.

We are grateful to Uday Rajan, who has completed his second term as an editor. Uday has been with RCFS since 2015 and we are so thankful to him for his dedication.

We welcome Robert Marquez to the team as an editor.

We are also grateful to our retiring associate editors:

Radhakrishnan Gopalan
Alex Edmans
Philip Bond
Michael Fishman
Sheridan Titman.