Takeover bids and target directors' incentives: the impact of a bid on directors' wealth and board seats

I investigate the nature of the incentives that lead outside directors to serve stockholders' interests. Specifically, I document the effect of a takeover bid on target directors, both in terms of its immediate financial impact and its effect on the number of future board seats held by those target directors. Directors are rarely retained following a completed offer. All target directors hold fewer directorships in the future than a control group, suggesting that the target board seat is difficult to replace. For outside directors, the direct financial impact of a completed merger is predominately negative. This documents a cost to outside directors should they fail as monitors, forcing the external control market to act for them. Future seats are related to pre-bid performance. Among outside directors of poorly performing firms, those who rebuff an offer face partial settling-up in the directorial labor market, while those who complete the merger do not. (C) 2003 Elsevier Science B.V. All rights reserved.