ACCTG 502 | Session 4 | Zombie Board: Board Tenure and Firm Performance

ACCTG 502 | Session 4 | Zombie Board: Board Tenure and Firm Performance - 2018 STERLING HUANG AND GILLES HILARY Introduction: We demonstrate that board tenure has an inverted U‐shaped relationship with firm value and accounting performance. The quality of corporate decisions, such as M&A, financial reporting, and CEO compensation, also shows a quadratic relationship with board tenure. Our findings support the interpretation that directors' on‐the‐job learning enhances firm value up to a certain point, beyond which entrenchment begins to dominate and firm performance declines. To address endogeneity concerns, we analyze a sample of firms where an outside director experienced a sudden death, and find that such deaths, which shift board tenure away from (or toward) the empirically observed optimal level in the cross-section, are linked to negative (or positive) announcement returns. The quality of corporate decisions also exhibits an inverted U‐shaped pattern in a sample of firms impacted by the death of a director.