Takeover Markets and Corporate Board Composition: Some further evidence

There is evidence that corporate boards monitor and discipline managerial behaviour, a view also taken of an active market for corporate control. We investigate the extent to which board composition reflects restrictions on corporate control transactions, an outcome consistent with substitution between corporate governance mechanisms. In contrast to prior research, our results show that corporate boards are larger, and comprise a relatively higher proportion of outside directors when the firm is incorporated in a state with relatively restrictive takeover legislation. We interpret these findings as indicative of potential substitution among corporate governance mechanisms, an outcome often overlooked by advocates of “compulsory” board structures.