Are Busy Boards Effective Monitors?

doi:10.1111/j.1540-6261.2006.00852.x

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Wiley InterScience

The Journal of Finance

Volume 61 Issue 2, Pages 689 - 724

Published Online: 9 Mar 2006

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Are Busy Boards Effective Monitors?

ELIEZER M. FICH and ANIL SHIVDASANI*

Correspondence to *Fich is with Drexel University and Shivdasani is with the University of North Carolina at Chapel Hill. The paper benefited from comments by participants at the 2005 American Finance Association meetings, the 2004 Financial Research Association conference, and by seminar participants at Drexel, INSEAD, Seton Hall, North Carolina State, University of North Carolina, and Universidade Catolica de Portugal. The authors thank Anup Agrawal, Stuart Gillan, Bill Greene, Naveen Khanna, Robert Stambaugh, David Yermack, and an anonymous referee for helpful suggestions. The authors acknowledge financial support from the Wachovia Center for Corporate Finance.

ABSTRACT

IV. Appointments and Departures of Busy Outside Directors

Firms with busy boards, those in which a majority of outside directors hold three or more directorships, are associated with weak corporate governance. These firms exhibit lower market-to-book ratios, weaker profitability, and lower sensitivity of CEO turnover to firm performance. Independent but busy boards display CEO turnover-performance sensitivities indistinguishable from those of inside-dominated boards. Departures of busy outside directors generate positive abnormal returns (ARs). When directors become busy as a result of acquiring an additional directorship, other companies in which they hold board seats experience negative ARs. Busy outside directors are more likely to depart boards following poor performance.

DIGITAL OBJECT IDENTIFIER (DOI)

10.1111/j.1540-6261.2006.00852.x About DOI