Differential market valuations of board busyness across alternative banking models

Marwa Elnahass,Aly Salama,Vu Quang Trinh,Kamil Omoteso

doi:10.1007/s11156-019-00841-4

Marwa Elnahass, Aly Salama + Show 2 more

Open Access

https://doi.org/10.1007/s11156-019-00841-4

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Abstract

This study comparatively assesses the influence of board busyness (i.e., multiple directorships of outside directors) on stock market valuations of both Islamic and conventional banks. For a sample of listed banks from 11 countries for the period 2010–2015, results show that board busyness is differentially priced by investors depending on the bank type.In conventional banks, board busyness is significantly and positively valued by the stock market. This result suggests that investors perceive some reputational benefits arising from a busy board (e.g., extended industry knowledge, established external networks or facilitation of external market sources). In contrast, we find no supporting evidence on the market valuations of board busyness in Islamic banks. This result might be attributed to, both, the complex governance structure and the uniqueness of the business model which require additional effective monitoring, relative to that employed in conventional banking. Our results also show that investors provide significantly low market valuations for busy Shari’ah advisory board which acts as an additional layer of governance in Islamic banks. Findings in this study offer important policy implications to international banking studies and regulations governing countries with dual-banking systems.

Highlights

Regulators and market participants in capital markets have long emphasised on the critical role of the board of directors, as a core corporate governance mechanism, in promoting a country’s economic growth and financial stability
For Islamic banks (IBs), we find no significant evidence on the association between firm performance and busy board of directors (BOD), but a busy SSB is associated with significantly low firm performance
Motivated by the long controversy regarding the effect of board busyness on firm value, we investigate whether board busyness affects stock market valuations

Summary

Introduction

Regulators and market participants in capital markets have long emphasised on the critical role of the board of directors, as a core corporate governance mechanism, in promoting a country’s economic growth and financial stability. A bank market value is likely to increase as the agency conflicts diminish because such lower agency costs can effectively protect investors’ wealth From this perspective, board busyness can influence bank market value by either restricting or encouraging managers from expropriating bank resources. Strong governance implies an active role by boards in monitoring top managers, mitigating risks and enhancing long-term resilience all of which should be, in principle, positively priced by investors. This argument is in line with the Slack Resource theory which suggests that firms with higher market valuation tend to have more economic resources to invest in the long-term improvements of their governance mechanisms and board monitoring quality. Any reputational damage to the BODs, could constitute a severe threat to the survival of the firm, and have an adverse impact on the market valuations

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