Bank Performance and Risk-Taking – Does Directors’ Busyness Matter?

Abstract

This paper extends the literature on busyness of directors (board) and bank performance on emerging markets. We argue that a quadratic model parsimoniously captures the tension between the ‘reputation hypothesis’ and ‘over-boarding hypothesis. We find a robust inverted u-shaped relationship between inside directors’ busyness. Independent directors’ busyness on the other hand does not have any impact on performance. We calculate the optimal level of busyness. The inverted u-shaped relationship shows that the reputation hypothesis dominates the over-boarding hypothesis at less than the optimal level of busyness and vice versa. This allows us to reconcile the mixed evidence in the literature on busyness and performance. We also find some evidence that inside directors’ busyness reduces risk whereas independent directors’ busyness increases risk.

Keywords: Busy Directors, Independent Directors, Inside Directors, Bank Performance and Risk, Emerging Markets