Director attention and firm value

Abstract

In this article, we show that exogenous director distraction affects board monitoring intensity and leads to a higher level of inactivity by management. We construct a firm-level director "distraction" measure by exploiting shocks to unrelated industries in which directors have additional directorships. Directors attend significantly fewer board meetings when they are distracted. Firms with distracted board members tend to be inactive and experience a significant decline in firm value. Overall, this article highlights the impact of limited director attention on the effectiveness of corporate governance and the importance of directors in keeping management active.

Lead independent director and earnings management

“…Cashman et al (2012) confirm a consistent negative relation between busy directors and firm performance after a specific empirical approach. Renjie and Verwijmeren (2020) support the notion that firms have lower valuations when their board members are distracted. On the basis of these articles, we expect that firms with LIDs tend to experience a significant increase in firm value.…”

Director awards and board effectiveness

“…Atanassov and Park (2020) argue that award-winning CEOs innovate more compared to otherwise similar CEOs who do not win prestigious awards. Ammann et al (2016) find that competitors of award-winners take more risk, have more innovation activity, and show a better operating performance, which 3 Renjie and Verwijmeren (2020) examine director inattention from exogenous distractions and find that distracted directors decrease firm value. Similarly, Dang et al (2021) demonstrate that media attention and firm value are positively related due to reductions in information asymmetry and monitoring by the media.…”

“…The impact of attention on decision-making has also been well documented. Renjie and Verwijmeren (2020) examine director inattention from exogenous 4 Many other individual board characteristics separate from reputation have been linked to board effectiveness including independence (Coles et al, 2014), age (Jiang et al, 2016), tenure (Vafeas, 2003), education (Papadimitri et al, 2020), gender (Levi et al, 2014) and expertise (Chen et al, 2020). A wide array of studies examine these characteristics.…”

“…The impact of attention on decision‐making has also been well documented. Renjie and Verwijmeren (2020) examine director inattention from exogenous distractions and finds that distracted directors decrease firm value. Similarly, Dang et al (2021) demonstrate that media attention and firm value are positively related due to reductions in information asymmetry and monitoring by the media.…”