Hostname: page-component-cd9895bd7-gvvz8 Total loading time: 0 Render date: 2025-01-05T14:06:47.099Z Has data issue: false hasContentIssue false
  • English
  • Français

Market Evidence on Investor Preference for Fewer Directorships

Published online by Cambridge University Press:  28 January 2019

Keren Bar-Hava ,
Feng Gu  and
Baruch Lev
Keren Bar-Hava
Affiliation:
Bar-Hava, [email protected], the Hebrew University
Feng Gu*
Affiliation:
Gu, [email protected], the State University of New York at Buffalo School of Management
Baruch Lev
Affiliation:
Lev, [email protected], New York University Stern School of Business
*
Gu (corresponding author), [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

We examine investors’ preference for directors serving on fewer versus more boards (“busy directors”) by measuring market reaction to busy directors’ resignations at the companies that still keep these directors on the board. We find a positive reaction implying a preference for fewer directorships. The reaction is more positive when the need for the director’s services is greater, when the resignation frees up more of the director’s time, and when the director is of higher quality. Furthermore, we find that following their resignation, directors increase their board responsibilities/leadership at firms that still retain them and seek no board appointments elsewhere.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 3 , May 2020 , pp. 931 - 954
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank Paul Malatesta (the editor), Robert Schonlau (the referee), and workshop participants at INSEAD, National University of Singapore, New York University, Tel Aviv University, the Hebrew University, and the 2014 Massachusetts Institute of Technology (MIT) Asia Conference in Accounting for helpful comments and suggestions. Gu thanks the financial support from the State University of New York at Buffalo.

References

Bar-Hava, K., and Segal, D.. “Do Outside Directors Tell the Truth, the Whole Truth, and Nothing but the Truth When They Resign?” Working Paper, the Hebrew University (2010).Google Scholar
Barth, M.; Kasznik, R.; and McNichols, M.. “Analyst Coverage and Intangible Assets.” Journal of Accounting Research, 39 (2001), 1–34.Google Scholar
Beasley, M. S.“An Empirical Analysis of the Relation between the Board of Director Composition and Financial Statement Fraud.” Accounting Review, 71 (1996), 443–465.Google Scholar
Booth, J., and Deli, D.. “Factors Affecting the Number of Outside Directorships Held by CEOs.” Journal of Financial Economics, 40 (1996), 81–104.Google Scholar
Brickley, J.; Linck, J.; and Coles, J.. “What Happens to CEOs after They Retire? New Evidence on Career Concerns, Horizon Problems, and CEO Incentives.” Journal of Financial Economics, 40 (1999), 81–104.Google Scholar
Brown, S., and Warner, J.. “Using Daily Stock Returns: The Case of Event Studies.” Journal of Financial Economics, 14 (1985), 3–31.Google Scholar
Chandar, N.; Klein, A.; and Zheng, X.. “Do Multiple Directorships for Audit Committee Members Influence Financial Reporting Quality?” Working Paper, New York University (2012).Google Scholar
Chasan, E., and Lublin, J.. “ISS Adopts Stricter Policy on Director ‘Overboarding’.” Wall Street Journal, Nov. 20 (2015).Google Scholar
Core, J.; Holthausen, R.; and Larcker, D.. “Corporate Governance, Chief Executive Officer Compensation, and Firm Performance.” Journal of Financial Economics, 51 (1999), 371–406.Google Scholar
DeFond, M.; Hann, R.; and Hu, X.. “Does the Market Value Financial Expertise on Audit Committees of Board of Directors?” Journal of Accounting Research, 43 (2005), 153–193.Google Scholar
Elyasiani, E., and Zhang, L.. “Bank Holding Company Performance, Risk and ‘Busy’ Board of Directors.” Journal of Banking and Finance, 60 (2015), 239–251.Google Scholar
Fahlenbrach, R.; Low, A.; and Stulz, R.. “Why Do Firms Appoint CEOs as Outside Directors?” Journal of Financial Economics, 97 (2010), 12–32.Google Scholar
Falato, A.; Kadyrzhanova, D.; and Lel, U.. “Distracted Directors: Does Board Busyness Hurt Shareholder Value?” Journal of Financial Economics, 113 (2014), 404–426.Google Scholar
Fama, E.“Agency Problems and the Theory of the Firm.” Journal of Political Economy, 88 (1980), 288–307.Google Scholar
Fama, E., and Jensen, M.. “Separation of Ownership and Control.” Journal of Law and Economics, 26 (1983), 301–325.Google Scholar
Ferris, S.; Jagannathan, M.; and Pritchard, A.. “Too Busy to Mind the Business? Monitoring by Directors with Multiple Board Appointments.” Journal of Finance, 59 (2003), 1087–1111.Google Scholar
Fich, E., and Shivdasani, A.. “Are Busy Boards Effective Monitors?” Journal of Finance, 61 (2006), 689–724.Google Scholar
Field, L.; Lowry, M.; and Mkrtchyan, A.. “Are Busy Boards Detrimental?” Journal of Financial Economics, 109 (2013), 63–82.Google Scholar
Gilson, S.“Bankruptcy, Boards, Banks, and Blockholders.” Journal of Financial Economics, 26 (1990), 355–387.Google Scholar
Harford, J.“Takeover Bids and Target Directors’ Incentives: The Impact of a Bid on Directors’ Wealth and Board Seats.” Journal of Financial Economics, 69 (2003), 51–83.Google Scholar
Harford, J., and Schonlau, R.. “Does the Director Labor Market Offer Ex Post Settling-Up for CEOs? The Case of Acquisitions.” Journal of Financial Economics, 110 (2013), 18–36.Google Scholar
Kaplan, S., and Reishus, D.. “Outside Directorships and Corporate Performance.” Journal of Financial Economics, 27 (1990), 389–410.Google Scholar
Krouse, S., and Lublin, J.. “Big Investors Want Directors to Stop Sitting on So Many Boards.” Wall Street Journal, Sept. 26 (2017), B1.Google Scholar
Ljungqvist, A., and Raff, K.. “Busy Directors: Strategic Interaction and Monitoring Strategies.” Working Paper 23889, National Bureau of Economic Research (2017).Google Scholar
Mace, M.Directors: Myth and Reality. Boston, MA: Harvard Business School Press (1986).Google Scholar
Masulis, R., and Mobbs, S.. “Are All Inside Directors the Same? Evidence from the External Directorship Market.” Journal of Finance, 66 (2011), 823–872.Google Scholar
Masulis, R., and Mobbs, S.. “Independent Director Incentives: Where Do Talented Directors Spend Their Limited Time and Energy?” Journal of Financial Economics, 111 (2014), 406–429.Google Scholar
Masulis, R., and Zhang, E.. “Preoccupied Independent Directors.” Working Paper, University of New South Wales (2017).Google Scholar
Perry, T., and Peyer, U.. “Board Seat Accumulation by Executives: A Shareholder’s Perspective.” Journal of Finance, 60 (2005), 2083–2123.Google Scholar
Shivdasani, A.“Board Composition, Ownership Structure and Hostile Takeovers.” Journal of Accounting and Economics, 16 (1993), 167–198.Google Scholar
Shivdasani, A., and Yermack, D.. “CEO Involvement in the Selection of New Board Members: An Empirical Analysis.” Journal of Finance, 54 (1999), 1829–1853.Google Scholar
Society of Corporate Secretaries and Governance Professionals. 2016 Proxy Voting Policies. New York, NY: Society of Corporate Governance Professionals(2015). Available at https://connect.societycorpgov.org/HigherLogic/System/DownloadDocumentFile.ashx?DocumentFileKey=2f4f3429-aca2-87f5-98c4-619f96590b19.Google Scholar