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This Article argues that “noise adopters,” namely firms whose corporate governance is determined by non-substantive factors such as attorneys’ boilerplates, network externalities, and mere inertia, provide camouflage to insiders with a strong preference for entrenchment. Normally, a deliberate choice of entrenching governance terms could signal weak market discipline and high extraction of private benefits. Yet, since some firms stagger their boards or incorporate in their home state almost randomly, these choices send only a noisy signal, and in turn result in only a partial market discount of firm value. Entrenchment-seeking managers can achieve their desired level of entrenchment without paying a full price.
This analysis highlights informational limits on markets’ ability to perfectly price corporate governance terms. The value of governance terms varies across firms due to unobservable variations in market forces, and potential signaling is obscured by practices of random adoption.
Noise adopters influence patterns of adoptions and help explain puzzling evidence regarding pricing and adoption of governance terms.