Differential market valuations of board busyness across alternative banking models

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.

Board busyness and new insights into alternative bank dividends models

“…Sharma 2011; Elyasiani and Zhang 2015), indicating ineffective monitoring ability by busy boards to review a complex dividend model like IBs. In addition, the results showing the distinct impacts of BOD busyness on the Islamic versus conventional banking business models further support arguments by Elnahass et al (2020a) and Trinh et al (2020a) showing that busy BODs are likely to exacerbate agency conflicts in IBs, leading to lower bank stability and poorer market valuations relative to conventional banks. There overall findings are in line our expectations and support the study's main hypothesis.…”

“…However, these benefits are less likely to be obtained by Islamic banks because their business model is marked with greater complexity. Therefore, board busyness in conventional banks is predicted to be more beneficial from a reputational and expertise perspectives when compared to their Islamic counterparts (Elnahass et al 2020a). Such reputational benefits are likely to influence the dividends business model of conventional banking, leading to possibly higher payouts levels.…”

“…Board busyness is likely to lead to high agency costs, related to free cash flow and optimal choices of financial policies. Such associated conflicts have adverse impacts on dividend payout levels, investors' perceptions and stock market valuations (Sharma 2011;Chou and Feng 2019;Elnahass et al 2020a). However, employing a busy BOD might still bring some reputational benefits to firms such as promoting extended business networking as well as connections, and quick access to market resources (Trinh et al 2020b).…”

“…Islamic and conventional banks). While comparative assessments across the two bank types have been evolving over the past few years (e.g., Mollah and Zaman 2015;Mollah et al 2017;Elnahass et al 2020a;Trinh et al 2020a, b), however, none of these studies have explicitly examined the association between board busyness and dividend payouts under the different banking business models like the Islamic and conventional models. Thus, investigating the influence of busy boards across Islamic and conventional banks will contribute to the ongoing debate identifying the impacts of different institutional characteristics and the importance of an effective governance system within the domain of dividend strategies in financial institutions.…”

“…For example, board busyness might encourage managers to ex-post deviate from the payout policy and engage in poor or risky investment decisions. The negative impact of board busyness is likely to be more pronounced in Islamic banks than conventional banks (Elnahass et al 2020a;Trinh et al 2020a). Weak monitoring by the busy board can thus result in adverse selection and moral hazard problems on both sides of the balance sheet of Islamic banks (Visser 2009).…”