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Are Busy Boards Effective Monitors?

50 Pages Posted: 22 Oct 2004  

Eliezer M. Fich

Drexel University - Department of Finance

Anil Shivdasani

University of North Carolina Kenan-Flagler Business School

Multiple version iconThere are 2 versions of this paper

Date Written: October 2004

Abstract

We present evidence that busy outside directors are associated with weak corporate governance based on a sample of U.S. industrial firms from 1989 to 1995. When a majority of outside directors serve on three or more boards, firms exhibit lower market-to-book ratios as well as weaker operating profitability. Appointments of busy outside directors appear unrelated to company performance, but such directors are more likely to depart boards following poor firm performance. When a majority of outside directors are busy, the sensitivity of CEO turnover to performance is significantly lower than when a majority of outside directors are not busy. Investors applaud departures of busy outside directors, and this effect is more pronounced for firms where the departure results in the majority of the remaining outside directors being not busy. When directors become busy as a result of acquiring an additional board seat, firms where they serve as directors experience negative abnormal returns.

Keywords: Directorships, Board of directors, Corporate governance, Firm performance

JEL Classification: G30, G39, K22

Suggested Citation

Fich, Eliezer M. and Shivdasani, Anil, Are Busy Boards Effective Monitors? (October 2004). ECGI - Finance Working Paper No. 55/2004; AFA 2005 Philadelphia Meetings. Available at SSRN: https://ssrn.com/abstract=607364 or http://dx.doi.org/10.2139/ssrn.607364

Eliezer M. Fich (Contact Author)

Drexel University - Department of Finance ( email )

LeBow College of Business
3220 Market Street – 11th Floor
Philadelphia, PA 19104
(215) 895-2304 (Phone)

Anil Shivdasani

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-3182 (Phone)
919-962-2068 (Fax)

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