Busy Directors: Strategic Interaction and Monitoring Synergies

Busy Directors: Strategic Interaction and Monitoring Synergies

Alexander Ljungqvist, Konrad Raff

Series number :

Serial Number: 
533/2017

Date posted :

October 10 2017

Last revised :

March 12 2018
SSRN Share

Keywords

  • boards of directors • 
  • busy directors • 
  • monitoring

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).

Authors

Dr.
Real name:
Konrad Raff
Norwegian School of Economics