Using a sample of 102 spinoffs in the period 1981 to 1997, we investigate the relation between corporate governance and the spinoff decision. Diversified firms conducting a spinoff have characteristics previously hypothesized to be associated with more effective corporate governance, such as greater ownership by outside board members, more heterogeneous boards, and fewer board members, in comparison to a set of peer firms. Post spinoff, relative valuation measures increase a significantly greater extent than for peer firms. These findings are consistent with the view that agency problems are a contributing factor in firms maintaining value destroying diversification strategies.

We analyze changes in investment policy following 106 spinoffs between 1981 and 1996. Pre-spinoff, the sample firms are valued at a discount and invest less in their high q segments than do their single-segment peers. Post-spinoff, there is a significant increase in measures of investment efficiency and the diversification discount is eliminated. Furthermore, changes in excess value around the spinoff are positively related to changes in measures of investment efficiency. These findings support the view that (i) diversified firms allocate investment funds inefficiently, and (ii) by breaking up the conglomerate, spinoffs create value by improving investment efficiency.

Classified boards actually benefit firms that have low monitoring costs and greater needs for advisory services. Previous literature has emphasized the entrenchment effect of classified boards. However, we find that this adverse impact of classified boards can be offset or even superseded by the potential benefits of board classification for firms who hope to benefit from the advisory services of their independent directors. We show that firms with greater advising needs appoint more outside directors with diverse attributes and expertise, qualifications that enhance the ability to provide useful advice to managers. Furthermore, in such firms, board classification is associated with higher performance sensitivity of forced CEO turnover and better acquisition performance. Conversely, in firms with high monitoring costs, board classification hurts managerial equity-based incentives and risk-taking incentives. These findings suggest how and through which channels classified boards engender the differential effects on firm value.

This paper examines the impact of multiple directorships on stockholder wealth around the announcements of mergers and acquisitions. Grounded in agency theory, we argue that multiple directorships affect the quality of managerial oversight and thus influence agency conflicts in acquisition decisions. We show that acquiring firms where directors hold more outside board seats experience more negative abnormal returns. This adverse effect, nonetheless, does not extend across the entire range of multiple directorships. Rather, the detrimental impact is significant only when the number of outside board seats surpasses a certain threshold. We interpret this result as suggesting that directors serving on multiple boards allow value-destroying acquisitions when they become too busy beyond a certain point, and the effect of directors’ busyness on acquisition performance appears to be nonlinear. We employ several alternative definitions of directors’ busyness and obtain consistent results.