Abstract
In a cross-country setting, we document that busy boards of directors (i.e., outside directors with multiple directorships) enhance a bank's financing capacity by lowering its cost of debt, which is consistent with the signalling quality hypothesis. Our analysis further reveals that this negative association is more pronounced in conventional banks than their Islamic counterparts. Possibly owning to the distinctive governance structure and the complexity of the Islamic business model, which requires closer monitoring, Muslim debtholders might depreciate a busy board of directors as it is likely to associate with lower scrutinising effectiveness. Our results provide a positive counterpoint to the negative relationship that exists between busy directors and firm performance, and contributes to understanding the indispensable role busy boards play in debt financing.
Highlights
In a cross-country setting, we document that busy boards of directors enhance a bank's financing capacity by lowering its cost of debt, which is consistent with the signalling quality hypothesis
Our results provide a positive counterpoint to the negative relationship that exists between busy directors and firm performance, and contributes to understanding the indispensable role busy boards play in debt financing
Our findings contribute to the line of research that focuses on the relationship between board attributes and the cost of debt (e.g., Chakravarty & Rutherford, 2017; Lorca et al, 2011); and complement comparative governance literature underpinning the Islamic conventional banking paradigm (e.g., Mollah & Zaman, 2015; Mollah, Hassan, Al Farooque, & Mobarek, 20175; Trinh et al, 2019) by investigating the impact of the board busyness on a bank's borrowing rates from an international perspective
Summary
“Given that bank loans are the primary source of financing for most economies, the cost of debt plays a significant role in an economy's growth and performance”. (Chen, Filardo, He, & Zhu, 2016, p.70). Our findings contribute to the line of research that focuses on the relationship between board attributes and the cost of debt (e.g., Chakravarty & Rutherford, 2017; Lorca et al, 2011); and complement comparative governance literature underpinning the Islamic conventional banking paradigm (e.g., Mollah & Zaman, 2015; Mollah, Hassan, Al Farooque, & Mobarek, 20175; Trinh et al, 2019) by investigating the impact of the board busyness on a bank's borrowing rates from an international perspective. Our paper has incrementally contributed to existing corporate governance research in Islamic and conventional banking system by comparatively evaluating board busyness function in a linkage with lenders or debtholders This ends up with a consideration of bank cost of debt and board busyness within the specific context of those both bank types.
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