ROLE OF INSIDE DIRECTORS IN MITIGATING NEGATIVE EFFECTS OF OUTSIDE DIRECTORS’ BUSYNESS

In this study, I investigate the effect of outside directors’ busyness on firm performance, and how the presence of a certified inside director (CID) on the board alters the busyness effect. Busy outside directors are over-stretched to provide adequate monitoring. Certified inside directors (CIDs), inside directors holding a directorship at an unaffiliated firm, have director labor market incentives to focus on their own firm’s performance and share firm-specific information to outside directors for effective monitoring. I find that the negative effect of outside directors’ busyness on firm performance is mitigated when a firm’s board includes a certified inside director (CID). This mitigating effect is more pronounced in firms where the costs of external monitoring and operational complexity are high. Director busyness has negative effects on both the level and the value of the cash holdings and the likelihood of earnings restatements, but these adverse busyness effects are mitigated by the presence of a certified inside director. The results are robust even after controlling for endogeneity with a wide variety of econometric techniques.