Busy Directors: Strategic Interaction and Monitoring Synergies

65 Pages Posted: 22 Feb 2017 Last revised: 7 Mar 2018

See all articles by Alexander Ljungqvist

Alexander Ljungqvist

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

Konrad Raff

Norwegian School of Economics (NHH)

Multiple version iconThere are 3 versions of this paper

Date Written: February 2018

Abstract

We derive conditions for when having a "busy" director on the board is harmful to shareholders and when it is beneficial. Our model allows directors to condition their monitoring choices on their co-directors' choices and to experience positive or negative monitoring synergies across firms. Whether busyness benefits or harms shareholders depends on whether directors' effort choices are strategic substitutes or complements and on the sign of the cross-firm synergies. Our empirical analysis exploits plausibly exogenous shocks that make directors busier on one board and examines how this spills over to other boards. Our results suggest that monitoring efforts typically are strategic complements, except when a firm finds itself facing a crisis. Consistent with the model, we find that busy directors increase monitoring at spillover firms when synergies are positive (which we show increases expected firm value) and reduce monitoring at spillover firms when synergies are negative (which we show reduces expected firm value).

Keywords: Boards of Directors, Busy Directors, Monitoring

JEL Classification: G34

Suggested Citation

Ljungqvist, Alexander and Raff, Konrad, Busy Directors: Strategic Interaction and Monitoring Synergies (February 2018). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 533/2017. Available at SSRN: https://ssrn.com/abstract=2919926 or http://dx.doi.org/10.2139/ssrn.2919926

Alexander Ljungqvist (Contact Author)

Stockholm School of Economics ( email )

111 60 Stockholm
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Konrad Raff

Norwegian School of Economics (NHH) ( email )

Department of Finance
Helleveien 30
Bergen, 5045
Norway

HOME PAGE: http://sites.google.com/site/raffkonrad/

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