Busy Boards, Cash Holdings and Corporate Liquidity: Evidence from UK Panel Data

Abstract

This study examines the effect of board busyness on corporate cash holdings. We offer new insights by evaluating two conflicting views regarding the quality of service that busy directors provide to corporate boards and their impact on decision making. One view is that directors who simultaneously 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 and leads into suboptimal corporate decisions (busyness effect). We analyse a large sample of UK listed companies over the 1997 to 2009 period and document evidence supporting a non-linear relationship between our proxy for board busyness and corporate cash holdings. 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 increases beyond a certain threshold, it negatively affects cash holdings, net cash and financial slack. JEL Classification: G3, G32