Grounded in agency theory, this study investigates whether staggered boards (in
which only a portion of directors are elected at one time) influence capital
structure choices. Leverage has been argued and shown to alleviate agency costs.
Because staggered boards can entrench inefficient managers, they may motivate
managers to adopt a lower level of debt, thereby avoiding the disciplinary
mechanisms associated with leverage. The empirical evidence supports this
hypothesis, showing that firms with a staggered board are significantly less
leveraged than those with unitary boards (in which all board members are elected
at one time). The impact of staggered boards on capital structure choices exists
both in industrial and regulated firms although it seems to vanish after
enactment of the Sarbanes–Oxley Act of 2002. The results show that
staggered boards are likely to bring about, and do not merely reflect, lower
leverage. Finally, the results demonstrate no significant adverse impact on firm
value as a result of excess leverage.