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

  • Pradit Withisuphakorn and Pornsit Jiraporn EMAIL logo
Published/Copyright: April 19, 2018

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.

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 effectsPropensity score matching
(1)(2)(3)(4)
Peters and Taylor (2017)

q
Peters and Taylor (2017) qPeters and Taylor (2017) qPeters and Taylor (2017) q
Great recession × average number of directorships0.150**0.310***
(2.147)(2.781)
Average number of directorships−0.120**−0.304**
(−2.365)(−2.371)
Great Recession × % of busy directors0.528***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 assets3.159***3.165***1.2661.280*
(9.020)(9.039)(1.643)(1.672)
Cash holdings/total assets1.237***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 liabilities0.138***0.138***0.0720.071
(5.835)(5.856)(1.169)(1.160)
Constant4.906***4.767***5.596***5.162***
(10.852)(11.070)(4.219)(4.048)
Firm-fixed effects
Observations14,05414,0543,9223,922
Adjusted R-squared0.5460.5460.6390.639
  1. 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) qPeters and Taylor (2017) qPeters and Taylor (2017) q
Great Recession × average number of directorships0.169**
(2.217)
Average number of directorships−0.289***
(−5.703)
Great Recession × % of busy directors0.640***
(3.025)
% of busy directors−0.696***
(−6.004)
Great Recession × busyness index0.060***
(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 assets1.719***1.742***1.727***
(4.509)(4.565)(4.529)
Cash holdings/total assets1.703***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 liabilities0.112***0.113***0.112***
(4.776)(4.830)(4.798)
Constant3.590***3.272***3.167***
(7.230)(6.741)(6.539)
Year-fixed effectsYesYesYes
Firm-fixed effectsYesYesYes
Observations14,05414,05414,054
Adjusted R-squared0.5600.5600.561
  1. Robust t statistics in parentheses.

    *** p < 0.01, ** p < 0.05, * p < 0.1.

Published Online: 2018-4-19

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