Working Paper: NBER ID: w23889
Authors: Alexander Ljungqvist; Konrad Raff
Abstract: We derive conditions for when having a “busy” director on the board is harmful to shareholders and when it is beneficial. Our model allows directors to condition their monitoring choices on their co-directors' choices and to experience positive or negative monitoring synergies across firms. Whether busyness benefits or harms shareholders depends on whether directors' effort choices are strategic substitutes or complements and on the sign of the cross-firm synergies. Our empirical analysis exploits plausibly exogenous shocks that make directors busier on one board and examines how this spills over to other boards. Our results suggest that monitoring efforts typically are strategic complements, except when a firm finds itself facing a crisis. Consistent with the model, we find that busy directors increase monitoring at spillover firms when synergies are positive (which we show increases expected firm value) and reduce monitoring at spillover firms when synergies are negative (which we show reduces expected firm value).
Keywords: busy directors; monitoring synergies; strategic interaction; corporate governance
JEL Codes: G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| busy directors (M12) | monitoring efforts (E01) |
| monitoring efforts (E01) | firm value (G32) |
| busy directors (M12) | firm value (G32) |
| monitoring efforts by busy director (E63) | monitoring efforts by other directors (G34) |
| negative synergies (F69) | monitoring efforts at spillover firms (F23) |
| positive synergies (O36) | monitoring efforts at spillover firms (F23) |
| monitoring efforts at spillover firms (F23) | firm value (G32) |