LABOR MARKET CONSEQUENCES FOR BUSY DIRECTORS: EVIDENCE FROM INTERNATIONAL MERGERS AND ACQUISITIONS

DOIhttp://doi.org/10.1111/jfir.12180
Date01 September 2019
Published date01 September 2019
The Journal of Financial Research Vol. XLII, No. 3 Pages 449489 Fall 2019
DOI: 10.1111/jfir.12180
LABOR MARKET CONSEQUENCES FOR BUSY DIRECTORS: EVIDENCE
FROM INTERNATIONAL MERGERS AND ACQUISITIONS
Stephen P. Ferris
Ball State University
Narayanan Jayaraman
Georgia Institute of Technology
MinYu (Stella) Liao
Illinois State University
Abstract
Using 13,233 acquisitions from 57 countries, we examine merger and acquisition
(M&A) decisions made by busy boards. We find that few busy acquirers originate
from emerging markets and that they tend to undertake crossborder mergers, favor
public targets, finance with cash and equity, pursue nondiversifying mergers, avoid
targets with multiple bidders, and longterm underperform relative to nonbusy
acquirers. Importantly, we discover a nonlinear relation between an acquirers board
busyness and merger announcement returns. We find that the labor market penalizes
directors who approve bad acquisitions but does not reward them for good mergers.
We find a similar nonlinear relation between an acquirers board busyness and its
longterm performance along with a suggestion of an optimal board busyness.
JEL Classification: G3, G34
I. Introduction
The labor market for outside directors is an important mechanism that provides
reputational and financial incentives to outside directors to monitor managers (Fama
1980; Fama and Jensen 1983). The literature on the labor market for outside directors,
however, focuses nearly exclusively on U.S. firms.
1
There are few studies that examine
the incentives of directors to monitor managers, given that such incentives can vary
significantly across countries. The primary reason for this variability is that the strength
of corporate governance is country specific as reported by La Porta et al. (1999, 2002).
Therefore, it is both interesting and useful to determine whether the global labor market
for directors helps align the interests of managers with shareholders. Using the number
1
Among these U.S.only studies are Gilson (1990), Kaplan and Reishus (1990), Brickley, Linck, and Coles
(1999), Coles and Hoi (2003), Ferris, Jagannathan, and Pritchard (2003), Harford (2003), Yermack (2004),
Srinivasan (2005), Fich and Shivdasani (2006), Ashraf et al. (2010), Jiang, Wan, and Zhao (2015), and Fos and
Tsoutsoura (2014). A notable exception is Lel and Miller (2015b), who use an international sample.
449
© 2019 The Southern Finance Association and the Southwestern Finance Association
of board seats a director holds to capture a directors reputation, we examine how
international merger and acquisition (M&A) decisions affect the total number of board
appointments subsequently held by a director.
The issue of multiple directorships on corporate boards has come under
increasing scrutiny from both academicians and practitioners (Fich and Shivdasani
2006).
2
There is conflicting evidence in the academic literature about the effect of
multiple directorships on firm value and performance. The arguments associated with
the effect of these multiple directorships separate into two hypotheses. The first is the
reputation hypothesis, which contends that individuals obtain valuable experience from
their multiple board appointments as well as build professional networks that make
them desirable board members (Gilson 1990; Kaplan and Reishus 1990; Booth and
Deli 1996; Brickley, Linck, and Coles 1999; Coles and Hoi 2003; Harford 2003;
Masulis and Mobbs 2011). The competing set of arguments, which we refer to as the
busyness hypothesis, is that these individuals become overcommitted in time and thus
are unable to provide the diligent monitoring required of their positions (Ferris,
Jagannathan, and Pritchard 2003; Kress 2018).
The literature has not established whether the reputation or busyness effect is
dominant. Field, Lowry, and Mkrtchyan (2013) suggest that both effects might be present,
with young firms enjoying the benefits of reputation and large, established firms suffering
the costs of director busyness and overcommitment. Ferris, Jayaraman, and Liao
(forthcoming) examine the effect of busy directors and boards on the value of a set of non
U.S. firms. They find that busy directors and boards are a global phenomenon but that
national culture helps explain the crosssectional variation in director and board busyness.
They also report that firms with busy boards exhibit lower markettobook ratios and
reduced profitability, but this effect is reversed for younger firms. Using a novel
identification strategy of exploiting the variation generated by mergers that terminate entire
boards, Hauser (2018) shows that a reduction in the number of board appointments held by
a director is associated with greater profitability and higher markettobook ratios. He
concludes that when directors hold fewer appointments, their firms benefit.
More recent studies examine the linkage between board busyness and major
corporate decisions such as M&As. Ahn, Jiraporn, and Kim (2010) show that acquiring
firms with busy boards experience more negative abnormal returns at the time of deal
announcement. Benson et al. (2015) examine the effects of busy directors on merger
premiums and conclude that busy directors are not uniformly detrimental. Both of these
studies restrict their sample to U.S. firms and do not explore the labor market
consequences for busy directors.
Although busy boards occur internationally, their effect on corporate M&A
decision making might not be as consistent as that observed in the United States. For
instance, national cultures help determine what is acceptable as a managerial incentive
2
See also Emily Chasan and Joann S. Lublin, 2015, ISS Adopts Stricter Policy on Director
Overboarding,Wall Street Journal (November 20, 2015), https://blogs.wsj.com/cfo/2015/11/20/issadopts
stricterpolicyondirectoroverboarding/.
450 The Journal of Financial Research
as well as a deterrent (Chen 1995; Williams and Zinkin 2008). Furthermore, the laws
and regulations governing business combinations vary considerably across countries,
affecting the ability of boards to influence M&A transactions. Finally, national
differences in corporate equity ownership structures and capital market depth affect the
extent to which M&A activity can occur in a country (La Porta et al. 1999). For these
reasons, the literature requires that board busyness and merger activity be further
examined using an international sample of firms. Additionally, it is useful to explore
the labor market consequences of M&A decisions made by busy directors.
Consequently, we focus on the relation among the busyness of international boards,
M&A outcomes, and the subsequent labor market consequences of those decisions. To
undertake our analysis, we first examine the outcome and quality of M&A decisions made
by busy boards. Second, we test whether the global labor market for corporate directors
reacts to the quality of M&A decisions made by busy directors. Finally, we compare the
longterm operating performance of acquisitions made by busy and nonbusy boards.
Our study provides several contributions to the literature. First, it offers an
international analysis of the relation among board busyness, M&A performance, and
director career outcomes while controlling for country, legal, industry, and firm factors.
Using 13,233 acquisitions from 57 countries, we find that only a few busy acquirers
originate from emerging markets and that they favor crossborder mergers, prefer
public targets, finance their acquisitions with a mix of cash and stock, pursue
nondiversifying mergers, avoid targets with multiple bidders, and longterm under-
perform relative to nonbusy acquirers.
Second, we extend the literature on the labor market consequences for
directors serving on multiple boards. We find that the labor market penalizes directors
who approve bad acquisitions. The market, however, does not reward directors with
new appointments for approving good mergers. Our results are robust to alternative
definitions of director busyness, model specifications, selection bias, and tests for
endogeneity. Our findings complement Lel and Miller (2015a), who provide evidence
that the labor market offers incentives for directors to monitor managers.
Third, this study contributes to the continuing debate between the reputation
and busyness hypotheses regarding busy directors. Our findings help us determine
whether busy boards signal director reputation (Gilson 1990; Kaplan and Reishus
1990; Booth and Deli 1996; Brickley, Linck, and Coles 1999; Coles and Hoi 2003;
Harford 2003; Masulis and Mobbs 2011; Rappa, Schmidt, and Urband 2017) or
indicate that directors are unable to provide meaningful oversight (Fich and Shivdasani
2006; Field, Lowry, and Mkrtchyan 2013; Kress 2018; Hauser 2018). We discover
there is a level of busyness where the advantages due to reputation, experience, and
networking shift and become negative because of overcommitment. This finding
implies there might be an optimal level of director busyness as it relates to firm value
and performance.
Finally, our study adds to the literature on the postmerger accounting
performance of acquirers. We discover that acquirers whose boards are busy
consistently underperform relative to those whose boards are not busy. We also
determine that longterm merger performance has an asymmetric effect on a directors
opportunity to gain additional board seats.
451Busy Directors

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