Does Managerial Entrenchment Managerial Matter in Management Buyouts? Evidence from Classified Evidence Board Provision

Using a sample of 232 U.S. management buyout (MBO) announcements between 1995 and 2013, we examine whether the presence of the classified board provision affects shareholder wealth and form performance around MBOs. Evidence shows that the existence of classified board provision is positively associated with stock returns around the time of the announcements. We examine whether the operational enhancements following MBOs result from the enhancement of corporate governance or the appropriation of private information. After controlling for firm characteristics and self-selection bias, we find that firms with the classified board provision show more pronounced improvements in operating performance in the period between the pre- and post-announcements, which is consistent with the private information hypothesis. Our logistic regression results suggest that the provision is positively associated with CEO turnover in the year following deal cancelations. These finding suggest that entrenched managers have strong incentives to use private information and exploit the undervaluation of their when they make buyout decisions.