Multiple directorships and the value of cash holdings

For example, managers may spend corporate cash holdings on perquisite consumption, empire building, excessive compensation, and subsidizing and sustaining unprofitable projects or divisions.

Our results do not depend on the assumption that the value of the G-Index in-between survey years is unchanged. In unreported analysis based solely on data from the survey years, we obtain largely similar results.

We compare across the two partitions, rather than using a three-way interaction on the pooled dataset, because this approach allows the coefficients on the control variables to vary across the partitions.

Since the second stage is the main focus of our study, we do not report the first-stage coefficient estimates. To formally assess the quality of the instruments, we perform the Hansen (1992) J-test of instrument orthogonality. This statistic jointly tests the null hypotheses of the correct model specification and the orthogonality of instruments with the errors. Our instruments perform adequately in the tests (p value between 0.36 and 0.81 in the four model specifications), indicating that we cannot reject the null hypothesis of instrument suitability.

These results are not reported here for the sake of brevity, but are available upon request.

A related issue is the channels or means through which multi-board directors affect excess cash accumulation. One channel that is observable and measurable is the frequency of board meetings that these directors hold. Board meetings are fundamental for directors to obtain information, participate in decision making, and perform their monitoring and advisory roles (Adams and Ferriera 2012). Increases in meetings allow continuous exchange of information with mangers. Brick and Chidambaran (2010) find a positive relationship between board meetings and firm value, and argue that the intensity of board activity represents an important dimension of board monitoring on the running of a firm. If multi-board directors are more effective monitors than other directors, they may motivate board members to provide more effort by holding additional meetings in order to monitor management. As a supplemental test, we employ the model of Brick and Chidambaran (2010), augmented with multiple directorships, to study the relationship between multiple directorships and board meeting frequency. We find that meeting frequency increases with the number of directorships held by board members for three of four measures of multiple directorships, implying that multiple directorships of directors improve board monitoring effectiveness. However, we must interpret this result with caution because it is possible that additional meetings are organized to provide more occasions for multi-board directors to compensate their absence from some regular board meetings. We thank the referee for suggesting these tests.

To ensure that our results are compared against the proper benchmark and are not simply capturing the mean reversion in operating ratios that has been widely documented in accounting literature, we match each firm in our sample with a control firm following a methodology in the spirit of Barber and Lyon (1996). For every acquiring firm, we find a control firm in the same industry that (1) has total assets between 50 and 150% of those of the acquiring firm and (2) has the closest operating performance to the acquiring firm in the fiscal year of the acquisition. The control firm must be listed on the AMEX, NYSE, or NASDAQ. It must not have been involved in a takeover during the 3 years since the acquisition completion date.

Since operating income is adjusted for R&D expenses, adding back R&D allows us to mitigate the possibility of a spurious relationship between performance measures and the independent variables.