Takeover Immunity, Takeovers, and the Market for Nonexecutive Directors


  • We are grateful to the editor (Bill Christie). Special thanks are due to an anonymous referee for many constructive comments and suggestions, which helped immensely in improving the paper. We thank Jonathan Clarke, Cheol Eun, Steve Ferris, Kishore Tandon, Thouraya Triki, and other seminar participants at the 2006 Financial Management Association European Annual Conference, 2006 Financial Management Association American Annual Conference, and seminars at Baruch College, Georgia Tech, and the University of Missouri. We alone are responsible for any errors and omissions.


We develop and test two competing hypotheses that relate the market for nonexecutive directors to the level of external monitoring mechanism of the firms they serve. The Reward for Discretion Hypothesis posits that directors are valued more when they display discretion concerning their choice of antitakeover provision (ATP) levels rather than follow a rule. Alternatively, the CEO Risk Aversion Hypothesis implies that CEOs seek directors with inclination for uniform and high ATP levels. We examine how changes in ATP levels and approval of value creating/destroying acquisitions affect the careers of nonexecutive directors. Our results, based on data from about 3,000 listed US companies during 1994-2003, support the Reward for Discretion Hypothesis.