A NEW PERSPECTIVE ON DIRECTOR BUSYNESS

• Published date: 01 June 2015
• DOI: http://doi.org/10.1111/jfir.12058
• Date: 01 June 2015

A NEW PERSPECTIVE ON DIRECTOR BUSYNESS

Chang Liu

Hawai’i Pacific University and Washington State University

Donna L. Paul

Washington State University

Abstract

We provide a new perspective to the multiple directorships literature, which focuses on

outside directors. Inside directors, however, are important in both the boardroom and

day-to-day operations of the firm. We find that any negative effect of director busyness is

more pervasive for inside directors than for outside directors. Additional analysis

reveals that bidding firms’acquisition announcement returns are decreasing in inside

director board appointments, but there is no such effect for outside directors. These

results highlight the importance of inside directors and demonstrate that firm

performance can be compromised when they sit on multiple boards.

JEL Classification: G30, G34

I. Introduction

According to the Spencer Stuart U.S. Board Index (Spencer Stuart 2012), 74% of S&P

500 companies limited additional corporate directorships for their board members in

2012 compared to 55% just five years earlier. This trend indicates that practitioners view

multiple directorships as unfavorable to the firm. It aligns with the overcommitment view

of multiple directorships, which posits that competing demands from different board

appointments create “busy”directors that compromise firm performance (e.g., Core,

Holthausen, and Larcker 1999; Fich and Shivdasani 2006; Conyon and Read 2006;

Cashman, Gillan, and Jun 2012). Others argue, however, that multiple directorships

certify a director’s reputation as an expert in advising and monitoring. This view suggests

that busy directors can add value to their firm through their certified human capital (e.g.,

Perry and Peyer 2005; Masulis and Mobbs 2011; Field, Lowry, and Mkrtchyan 2013).

These studies on the effect of busy directors focus primarily on outside directors,

likely due to the perceived importance of outsiders in solving the agency problem.

However, several authors (e.g., Raheja 2005; Adams and Ferreira 2007; Harris and Ravis

2007) emphasize the endogeneity of board composition and in so doing bring growing

awareness to the role that inside directors play in the boardroom. Insiders have valuable

firm-specific information that outsiders rely on and must effectively communicate this

The authors are grateful to Daniel Deli (the referee), George Jiang, John Nofsinger, David Whidbee, and

seminar participants at Washington State University for helpful comments and suggestions.

The Journal of Financial Research Vol. XXXVIII, No. 2 Pages 193–217 Summer 2015

193

© 2015 The Southern Finance Association and the Southwestern Finance Association

RAWLS COLLEGE OF BUSINESS, TEXAS TECH UNIVERSITY

PUBLISHED FOR THE SOUTHERN AND SOUTHWESTERN

FINANCE ASSOCIATIONS BY WILEY-BLACKWELL PUBLISHING

knowledge to outsiders for the board to function well. Thus, inside directors can affect

firm performance by the quality of both their decision making as corporate executives

and the information they provide to facilitate decision making by outside directors. In this

context, we argue that any investigation of the effect of multiple directorships held by

outsiders is incomplete without also considering the effect of directorships held by

insiders. Our study fills this gap in the literature by examining the effect on firm

performance of multiple directorships held by inside directors, controlling for

directorships held by outside directors.

1

In addition to providing new evidence on the effect of inside director busyness

on firm performance, our study also considers an attribute of outside directors that has not

received much attention in the literature but has the potential to deepen our understanding

of how outside directors affect firm performance. According to Spencer Stuart (2012),

active CEOs and executives of publicly traded firms are the most desired candidates for

firms seeking new outside directors. This is consistent with evidence in Faleye (2011)

that 71% of the largest 1,500 firms in the United States have at least one outside director

who is CEO of another firm. In our analysis, we are able to distinguish executive directors

(insiders of other firms that serve as outside directors of the firm in question) from

nonexecutive directors (not executives of any firm in our sample). We are thus able to

provide insight into the effect of director attributes on firm performance by jointly

considering executive outsiders that function in both director and executive roles and

nonexecutive outsiders that function in a director role only.

As Adams, Hermalin, and Weisbach (2010) argue, board characteristics develop

as a result of the firm’s contracting environment. Empirically, the use of firm fixed effects

along with other observable characteristics can capture this unobservable contracting

environment and to some extent alleviate endogeneity concerns. Following Fich and

Shivdasani (2006) and Cashman, Gillan, and Jun (2012), we use fixed effects regressions

to identify the relation between director busyness and firm performance in a sample of

approximately 10,000 S&P 1500 directors per year from 1998 to 2011. Results indicate

that firm performance, measured by Tobin’s Q and return on assets (ROA), is decreasing

in the directorships held by both inside and outside directors. However, the relation is

statistically robust for inside directors and only marginally significant for outside

directors. Subsample analysis reveals notable differences between larger (S&P 500) and

smaller (non–S&P 500) firms. A significant negative association between outsider

busyness and firm performance obtains only in smaller, non–S&P 500 firms. In contrast,

insider busyness is negatively related to firm performance in both S&P 500 and non–S&P

500 firms. Overall, these results highlight the importance of inside directors and suggest

that any marginal benefits brought by inside directors with multiple directorships are

subsumed by the marginal costs.

We also investigate how the degree of firm-specific information asymmetry

mediates the association between director busyness and firm performance. High

information asymmetry between corporate insiders and outsiders signals a difficult

contracting environment in that information discovery and transmission are more costly.

1

Throughout this article, the terms “multiple directorships”and “busy director”are used interchangeably.

194 The Journal of Financial Research