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Directors with a full plate: the impact of busy directors on bank risk

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  • Elizabeth Cooper
  • Hatice Uzun
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    Abstract

    Purpose – This paper aims to analyze the impact of busy directors on bank risk. Busy directors are directors with multiple directorships and other corporate responsibilities. Design/methodology/approach – First, univariate analysis is performed to see whether there are differences in governance structures of banks with busy boards and those with less-busy boards of directors. Second, multivariate regression analysis is used with two measures of bank risk as the dependent variable to see whether busy directors impact bank risk, while controlling for other factors that may influence risk. Findings – The paper finds that there are significant differences between banks in terms of governance structure when analyzing banks with busy boards and banks with less-busy boards. Importantly, the study shows that bank risk is positively related to multiple board appointments of bank directors. Research limitations/implications – These results provide support for the “busyness hypothesis” as opposed to the “reputation hypothesis” and add to the understanding of whether busy directors hurt or help boards. Practical implications – Results are important for regulators who seek to maintain a safe and sound banking system. Regulators can gain a better understanding of how much time and effort individual directors can contribute to a bank under examination. Originality/value – This is the first study in the banking literature on multiple board appointments. It also uses a unique approach to test whether director busyness is a determinant of bank risk.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Managerial Finance.

    Volume (Year): 38 (2012)
    Issue (Month): 6 (May)
    Pages: 571-586

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    Handle: RePEc:eme:mfipps:v:38:y:2012:i:6:p:571-586

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    Related research

    Keywords: Banks; Directors; Risk;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
    2. Claudio Loderer & Urs Peyer, 2002. "Board Overlap, Seat Accumulation and Share Prices," European Financial Management, European Financial Management Association, vol. 8(2), pages 165-192.
    3. Brickley, James A. & Coles, Jeffrey L. & Terry, Rory L., 1994. "Outside directors and the adoption of poison pills," Journal of Financial Economics, Elsevier, vol. 35(3), pages 371-390, June.
    4. Eliezer M. Fich & Anil Shivdasani, 2006. "Are Busy Boards Effective Monitors?," Journal of Finance, American Finance Association, vol. 61(2), pages 689-724, 04.
    5. Kaplan, Steven N. & Reishus, David, 1990. "Outside directorships and corporate performance," Journal of Financial Economics, Elsevier, vol. 27(2), pages 389-410, October.
    6. Stephen P. Ferris & Murali Jagannathan & A. C. Pritchard, 2003. "Too Busy to Mind the Business? Monitoring by Directors with Multiple Board Appointments," Journal of Finance, American Finance Association, vol. 58(3), pages 1087-1112, 06.
    7. Jiraporn, Pornsit & Davidson III, Wallace N. & DaDalt, Peter & Ning, Yixi, 2009. "Too busy to show up? An analysis of directors' absences," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 1159-1171, August.
    8. Yermack, David, 1996. "Higher market valuation of companies with a small board of directors," Journal of Financial Economics, Elsevier, vol. 40(2), pages 185-211, February.
    9. Jiraporn, Pornsit & Kim, Young Sang & Davidson, Wallace N. & Singh, Manohar, 2006. "Corporate governance, shareholder rights and firm diversification: An empirical analysis," Journal of Banking & Finance, Elsevier, vol. 30(3), pages 947-963, March.
    10. Jay C. Hartzell & Laura T. Starks, 2003. "Institutional Investors and Executive Compensation," Journal of Finance, American Finance Association, vol. 58(6), pages 2351-2374, December.
    11. Pathan, Shams, 2009. "Strong boards, CEO power and bank risk-taking," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1340-1350, July.
    12. Sullivan, Richard J. & Spong, Kenneth R., 2007. "Manager wealth concentration, ownership structure, and risk in commercial banks," Journal of Financial Intermediation, Elsevier, vol. 16(2), pages 229-248, April.
    13. Lucian Bebchuk & Alma Cohen & Allen Ferrell, 2009. "What Matters in Corporate Governance?," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 783-827, February.
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