Anil Shivdasani

Are Busy Boards Effective Monitors

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 turnoverperformance 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. ON DECEMBER 28, 2000, THE WALL STREET JOURNAL reported that Elaine L. Chao would be a nominee for President-elect George W. Bush’s cabinet.1 Only a few days prior to Ms. Chao’s confirmation as labor secretary, another Journal article described a growing trend among firms to limit the number of board seats their directors sit on because serving on too many boards may be detrimental to the quality of corporate governance. Coincidentally, this article also featured Ms. Chao as one of the 10 busiest directors among large U.S. corporations.2 As expected, upon her cabinet confirmation, Ms. Chao resigned her directorships at C.R. Bard, Clorox, Columbia/HCA Healthcare, Dole Foods, Northwest Airlines, and Protective Life. Ms. Chao’s cabinet appointment permits a case study analysis of the increasingly popular notion among shareholder activists, institutional investors, regulators, and many corporations that serving on several boards causes directors to be busy, rendering them ineffective monitors of corporate management. Using standard event study methodology, we find that Ms. Chao’s impending departure from the six boards in which she served as an outside director was viewed enthusiastically by investors. Table I shows that the mean 2-day cumulative ∗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. 1 Cummings, Jeanne, and Greg Jaffe (2000), A floated name for cabinet lands with a thud, Wall Street Journal, Eastern Edition, December 28, A12. 2 Lublin, Joann S. (2001), Multiple seats of power—Companies are cracking down on number of directorships board members can hold, Wall Street Journal, January 23, B1.

CEO Involvement in the Selection of New Board Members: An Empirical Analysis

We study whether CEO involvement in the selection of new directors influences the nature of appointments to the board. When the CEO serves on the nominating committee or no nominating committee exists, firms appoint fewer independent outside directors and more gray outsiders with conflicts of interest. Stock price reactions to independent director appointments are significantly lower when the CEO is involved in director selection. Our evidence may illuminate a mechanism used by CEOs to reduce pressure from active monitoring, and we find a recent trend of companies removing CEOs from involvement in director selection.

Board composition, ownership structure, and hostile takeovers☆

Abstract This paper examines whether differences in the structure of the board of directors and equity ownership contribute to the incidence of hostile takeovers. Evidence from a sample of completed and abandoned hostile takeover attempts that occurred during 1980–1988 indicates that, relative to a control sample, outside directors in hostile targets have lower ownership stakes and hold fewer additional outside directorships. Ownership by blockholders unaffiliated with management raises and that by affiliated blockholders decreases the likelihood of a hostile takeover attempt. These results suggest that the board of directors and hostile takeovers are substitute mechanisms and that unaffiliated blockholdings and hostile takeovers are complementary mechanisms for corporate control.

Firm Performance, Corporate Governance, and Top Executive Turnover in Japan

We examine the role of corporate governance mechanisms during top executive turnover in Japanese corporations. Consistent with evidence from U.S. data, the likelihood of nonroutine turnover is significantly related to industry-adjusted return on assets, excess stock returns, and negative operating income, but is not related to industry performance. The sensitivity of nonroutine turnover to earnings performance is higher for firms with ties to a main bank than for firms without such ties. Outside succession in Japan is more likely for firms with large shareholders and a main bank relationship. We document performance improvements subsequent to nonroutine turnover and outside succession.

Corporate restructuring during performance declines in Japan

This paper documents the restructuring of 92 Japanese corporations that experienced a substantial decline in operating performance during 1986 to 1990. We find that these Japanese firms implement a number of downsizing measures such as asset sales, plant closures, and employee layoffs. Firms also respond by expanding and diversifying their operations, as well as by restructuring their internal operations. Compared to a sample of US firms that experience a similar decline in operating performance however, Japanese firms are less likely to downsize, and layoffs affect a smaller fraction of their workforce. The frequency of asset downsizing and layoffs in Japanese firms increases with the equity ownership by the firms main bank and other blockholders. Blockholders also increase the probability of management turnover, outside director removals and outside director additions, but decrease the likelihood of acquisitions. Finally, we document that downsizing measures in Japan are associated with significant improvements in operating performance. We conclude that Japanese banks and blockholders perform an important monitoring function by triggering firm responses during periods of poor performance.

The Effect of Bank Relations on Investment Decisions: An Investigation of Japanese Takeover Bids

We study 154 domestic mergers in Japan during 1977 to 1993. In contrast to U.S. evidence, mergers are viewed favorably by investors of acquiring firms. We document a two-day acquirer abnormal return of 1.2 percent and a mean cumulative abnormal return of 5.4 percent for the duration of the takeover. Announcement returns display a strong positive association with the strength of acquirers relationships with banks. The benefits of bank relations appear to be greater for firms with poor investment opportunities and when the banking sector is healthy. We conclude that close ties with informed creditors, such as banks, facilitate investment policies that enhance shareholder wealth. Copyright The American Finance Association 2000.

Do Boards Affect Performance? Evidence from Corporate Restructuring*

We examine the effect of board composition on the restructuring activities of a sample of 94 firms that experienced a material decline in performance. We document that firms with a majority of outside directors on the board are more likely to initiate asset restructuring and employee layoffs and that the reduction in the scale of operations is larger for these firms than firms without a majority of outside directors. We also find subsequent improvements in operating performance for firms with a majority of outside directors that restructure and conclude that board composition has a material impact on corporate performance.

Did Structured Credit Fuel the LBO Boom

We demonstrate a link between the twin storms underlying the current financial crisis - the market for collateralized debt obligations (CDOs) and the market for leveraged loans. We show that structural changes in credit markets that led to the explosion in CDOs created an increased supply of bank loans for funding LBOs. This structured lending supported by CDOs led to cheaper credit, looser covenants, and more aggressive use of bank loans in financing LBOs. However, in sharp contrast to the LBO boom in the late 1980s, this easy credit did not lead to riskier LBO deals or deal structures. Our findings point to the effects of disintermediation of banks as they switched from an originate-and-hold to an originate-to-distribute lending model.

Leverage and internal capital markets: evidence from leveraged recapitalizations

Abstract We study the internal allocation of resources for diversified firms that complete a leveraged recapitalization. Before the recapitalization, internal capital markets allocate investment to high q segments. After the recapitalization, segment investment becomes less sensitive to q and more sensitive to segment cash flow. We show that firm value is positively related to investments sensitivity to segment q and negatively related to investments sensitivity to segment cash flow. Our analysis highlights an indirect cost of debt that has received little attention: pressure to meet interest obligations creates an incentive to emphasize investments that generate high levels of current cash flow.

Valuation effects of bank financing in acquisitions

Abstract In a sample of 115 cash tender offers between 1990 and 1996, banks extend financing in 70% of the tender offers and finance the entire tender offer in half of these takeovers. Bank financing of tender offers is more likely when internal cash reserves are low. Acquisitions that are entirely financed by banks are associated with large and significantly positive acquirer announcement returns. Announcement returns are also positively related to the fraction of the acquisition value financed by bank debt. The benefits of bank financing are most important for both poorly performing acquirers and acquirers facing substantial informational asymmetries. Our results suggest that bank debt performs an important certification and monitoring role for acquirers in tender offers.