Distracted Directors: Does Board Busyness Hurt Shareholder Value?

51 Pages Posted: 31 May 2013 Last revised: 12 Dec 2013

See all articles by Antonio Falato

Antonio Falato

Board of Governors of the Federal Reserve System

Dalida Kadyrzhanova

Georgia State University

Ugur Lel

University of Georgia - Department of Banking and Finance

Date Written: December 10, 2013

Abstract

This paper examines the impact of independent director busyness on firm value in a setting that addresses a key challenge that the board of directors is an endogenously determined institution. We use the deaths of directors and CEOs as a natural experiment to generate exogenous variation in the time and resources available to independent directors at interlocked firms. The sudden loss of such key co-employees is an ‘attention shock’ because it increases the board committee workload for some independent directors at the interlocked firm – the ‘treatment group’, but not others – the ‘control group’. In a hand-collected sample of 2,551 (592) firms that share a non-deceased independent director with 633 (189) firms subject to director (CEO) deaths, difference-in-differences estimates reveal that investors react negatively to these attention shocks. There is a significant negative stock market reaction of -0.79% (-0.95%) for director-interlocked firms in the treatment group, but no reaction for those in the control group. The treatment effect is significantly magnified by interlocking directors’ busyness (e.g., board size and number of outside directorships), the importance of their roles in the firm (e.g., type of committee membership), and their degree of actual independence (e.g., board classification). Overall, these results provide endogeneity-free evidence that independent directors’ busyness is detrimental to board monitoring quality and shareholder value.

Keywords: Busy directors, multiple directorship, firm valuation, independent directors, director and CEO death

JEL Classification: G14, G34, G32

Suggested Citation

Falato, Antonio and Kadyrzhanova, Dalida and Lel, Ugur, Distracted Directors: Does Board Busyness Hurt Shareholder Value? (December 10, 2013). Available at SSRN: https://ssrn.com/abstract=2272478 or http://dx.doi.org/10.2139/ssrn.2272478

Antonio Falato

Board of Governors of the Federal Reserve System ( email )

20th & C. St., N.W.
Washington, DC 20551
United States

Dalida Kadyrzhanova

Georgia State University ( email )

J Mack Robinson College of Business
35 Broad St, 12th Floor
Atlanta, GA 30303-3083
United States

Ugur Lel (Contact Author)

University of Georgia - Department of Banking and Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

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