Busy Boards, Corporate Liquidity and Financial Risk: Evidence from UK Panel Data

This study examines a relationship between corporate financial risk and board “busyness”. We offer new insights by evaluating two conflicting views on the quality of service that busy directors provide to corporate boards and their impact on board effectiveness. One view claims that directors who serve on multiple boards improve board decision making ability as they have better experience and business connections (reputational effect).The opposite view is that directors with multiple seats are “too busy to mind the business”, which creates serious agency problems (busyness effect). By analysing a large sample of UK listed companies over the 1997 to 2009 period, we document evidence supporting a non-linear relationship between our proxy for board busyness and certain aspects of financial risk. In line with the reputational effect, we find that companies with board members that hold seats in other companies maintain a higher level of cash, net cash and financial slack. This effect is present, however, only at low levels of board busyness. In line with the busyness effect, our findings suggest that as board busyness increase further to a certain threshold, it negatively affects cash holdings, net cash and financial slack, implying a higher level of financial risk. JEL Classification: G3, G32 EFM Classification: 110, 150