Opting for a Controlled-Firm Majority Independent Directors Exemption to NYSE or NASDAQ Listing Requirements: Much Ado about Nothing?

The behavior of controlled-firms that opt out of the requirement that the majority of their Board members be independent is contrasted against controlled-firms who conformed to requirement in the ten year period 2005-2014. The Boards and management structure of these exempt and non-exempt controlled firms are remarkably similar. We find exempt firms have on average smaller market values, but use more debt, hold less cash, make larger investments in intangible assets, spend more on R&D, and have a more efficient workforce that grows slower than non-exempt controlled firms. This pattern of behaviors is more consistent with a stewardship hypothesis. We find strong evidence that investors substantially increase the Q ratios of family and founder-controlled firms. We find weak evidence that obtaining a controlled-firm exemption reduces Q values, but these reductions are small compared with the reductions in Q values associated with adopting take-over barriers. We conclude the fear that many large firms seem to have over seeking an exemption may not be well founded.