Are Busy Directors Harmful or Helpful? Evidence from the Great Recession

Pradit Withisuphakorn; Pornsit Jiraporn

doi:10.1515/bejeap-2017-0249

Article

Are Busy Directors Harmful or Helpful? Evidence from the Great Recession

Pradit Withisuphakorn and Pornsit Jiraporn

Published/Copyright: April 19, 2018

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From the journal The B.E. Journal of Economic Analysis & Policy Volume 18 Issue 2

Abstract

We contribute to the debate on the costs and benefits of busy directors by investigating the effect of busy directors on firm value during a stressful time, i. e. during the Great Recession. Our results show that busy directors improve firm value significantly during the financial crisis. In particular, a rise in directors’ busyness by one standard deviation results in an improvement in Tobin’s q by 6.41 %. Directors with multiple board seats appear to help firms navigate the crisis more successfully, supporting the notion that multiple board seats signal higher quality. Outside the crisis period, however, we find that busy directors reduce firm value, consistent with many prior studies. Our results are crucial as they show that governance mechanisms function differently during stressful times than they do during normal times. Firms should exercise great caution before imposing limits on outside board seats on their directors.

Keywords: busy directors; multiple directorships; multiple board seats; corporate governance; financial crisis

JEL Classification: G30; G32; G34

References

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Appendix

Table 6:

The effect of busy directors on firm value during the Great Recession (with the Great Recession binary variable).

	Fixed effects		Propensity score matching
	(1)	(2)	(3)	(4)

	Peters and Taylor (2017) q	Peters and Taylor (2017) q	Peters and Taylor (2017) q	Peters and Taylor (2017) q
Great recession × average number of directorships	0.150**		0.310***
	(2.147)		(2.781)
Average number of directorships	−0.120**		−0.304**
	(−2.365)		(−2.371)
Great Recession × % of busy directors		0.528***		1.175***
		(2.587)		(3.940)
% of busy directors		−0.338***		−0.600**
		(−2.904)		(−2.097)
Great Recession	−0.681***	−0.516***	−0.915***	−0.575***
	(−6.271)	(−13.990)	(−4.759)	(−6.841)
Ln (board size)	−0.509***	−0.506***	−0.482	−0.453
	(−5.116)	(−5.098)	(−1.573)	(−1.491)
% of independent directors	−0.009***	−0.009***	−0.013***	−0.013***
	(−7.022)	(−7.049)	(−3.420)	(−3.484)
Ln (total assets)	−0.247***	−0.248***	−0.206*	−0.205*
	(−5.676)	(−5.693)	(−1.705)	(−1.696)
Total debt/total assets	−0.646***	−0.644***	−1.309**	−1.305**
	(−3.549)	(−3.537)	(−2.025)	(−2.005)
Dividends/total assets	−2.386*	−2.395*	−1.664	−1.664
	(−1.921)	(−1.927)	(−0.566)	(−0.565)
Capital expenditures/total assets	3.159***	3.165***	1.266	1.280*
	(9.020)	(9.039)	(1.643)	(1.672)
Cash holdings/total assets	1.237***	1.232***	1.809**	1.819**
	(3.985)	(3.973)	(2.467)	(2.483)
R&D/total assets	−8.741***	−8.736***	−9.626***	−9.625***
	(−7.956)	(−7.958)	(−4.320)	(−4.322)
Advertising/total assets	−1.601	−1.569	−1.572	−1.536
	(−1.379)	(−1.351)	(−0.451)	(−0.442)
Current Assets/current liabilities	0.138***	0.138***	0.072	0.071
	(5.835)	(5.856)	(1.169)	(1.160)
Constant	4.906***	4.767***	5.596***	5.162***
	(10.852)	(11.070)	(4.219)	(4.048)
Firm-fixed effects
Observations	14,054	14,054	3,922	3,922
Adjusted R-squared	0.546	0.546	0.639	0.639

Robust t statistics in parentheses.
***p < 0.01, **p < 0.05.

Table 7:

The effect of busy directors on firm value during the Great Recession (controlling for the interaction between board size and the Great Recession binary variable).

	(1)	(2)	(3)

	Peters and Taylor (2017) q	Peters and Taylor (2017) q	Peters and Taylor (2017) q
Great Recession × average number of directorships	0.169**
	(2.217)
Average number of directorships	−0.289***
	(−5.703)
Great Recession × % of busy directors		0.640***
		(3.025)
% of busy directors		−0.696***
		(−6.004)
Great Recession × busyness index			0.060***
			(2.720)
Busyness index			−0.084***
			(−6.219)
Great Recession × Ln (board size)	0.353***	0.355***	0.341***
	(2.707)	(2.818)	(2.664)
Ln (board size)	−0.616***	−0.610***	−0.612***
	(−6.030)	(−6.001)	(−6.002)
% of independent directors	−0.004***	−0.004***	−0.004***
	(−2.692)	(−2.859)	(−2.746)
Ln (total assets)	−0.010	−0.014	−0.010
	(−0.175)	(−0.248)	(−0.184)
Total debt/total assets	−0.848***	−0.842***	−0.844***
	(−4.524)	(−4.486)	(−4.502)
Dividends/total assets	−1.825	−1.881	−1.841
	(−1.461)	(−1.504)	(−1.473)
Capital expenditures/total assets	1.719***	1.742***	1.727***
	(4.509)	(4.565)	(4.529)
Cash holdings/total assets	1.703***	1.689***	1.697***
	(5.384)	(5.335)	(5.362)
R&D/total assets	−7.824***	−7.823***	−7.814***
	(−7.304)	(−7.317)	(−7.303)
Advertising/total assets	−1.287	−1.259	−1.246
	(−1.115)	(−1.091)	(−1.080)
Current Assets/current liabilities	0.112***	0.113***	0.112***
	(4.776)	(4.830)	(4.798)
Constant	3.590***	3.272***	3.167***
	(7.230)	(6.741)	(6.539)
Year-fixed effects	Yes	Yes	Yes
Firm-fixed effects	Yes	Yes	Yes
Observations	14,054	14,054	14,054
Adjusted R-squared	0.560	0.560	0.561

Robust t statistics in parentheses.
*** p < 0.01, ** p < 0.05, * p < 0.1.

Published Online: 2018-4-19

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Articles in the same Issue

https://doi.org/10.1515/bejeap-2017-0249

Keywords for this article

busy directors; multiple directorships; multiple board seats; corporate governance; financial crisis