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Two essays on multiple directorships

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Title:
Two essays on multiple directorships
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English
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Chen, Chia-wei
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Corporate governance
Board of directors
Busy outside directors
Shareholder wealth
Agency problems
Dissertations, Academic -- Finance -- Doctoral -- USF   ( lcsh )
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non-fiction   ( marcgt )

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Abstract:
ABSTRACT: This dissertation includes two related chapters that investigate the value of multiple directorships. In the first chapter, I focus on potential tradeoffs between the costs and benefits of multiple directorships held by outside directors and attempt to determine how firm characteristics affect such tradeoffs. It is widely believed that outside directors of a firm play important functions of monitoring and advising. As a result, the basic hypothesis of the first essay is that multiple directorships by outside directors can have different implications for firms that have different levels of monitoring and advising needs. Consistent with this hypothesis, the evidence suggests that firm performance is positively associated with multiple directorships for firms with high growth opportunities and low agency conflicts. Such firms would benefit more from better advising while not suffering much from less monitoring. Likewise, firm performance is negatively associated with multiple directorships for firms with low growth opportunities and high agency conflicts. In the second essay, I examine how multiple directorships held by outside directors affect shareholder wealth during acquisitions. The evidence indicates that not all busy outside directors have the same effect and some types of busy outside directors may benefit the firms.
Thesis:
Dissertation (Ph.D.)--University of South Florida, 2008.
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Includes bibliographical references.
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by Chia-wei Chen.
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Title from PDF of title page.
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Document formatted into pages; contains 69 pages.
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Includes vita.

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Two Essays on Multiple Directorships by Chia-wei Chen A dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy Department of Finance College of Business Administration University of South Florida Co-Major Professor: Jianping Qi, Ph.D. Co-Major Professor: Ninon Sutton, Ph.D. Patrick Kelly, Ph.D. Christos Pantzalis, Ph.D. Date of Approval: July 10th, 2008 Key Words: Corporate Governance, Board of Directors, Busy Outside Directors, Shareholder Wealth, Agency Problems, Growth Opportunities, Acquisitions Copyright 2008, Chia-wei Chen

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i Table of Contents List of Tables ii Abstract iii Essay 1 Growth Opportunities, Agency C onflicts, and the Effectiveness of Busy Outside Directors 1. Introduction 1 2. Hypothesis Development 5 3. The Sample and Variables A. The Sample Selection Process 10 B. Descriptive Statistics of the Sample 11 4. Empirical Results A. Univariate Tests 16 B. Multivariate Tests 19 C. Robustness Tests 23 5. Summary and Conclusions 29 Essay 2 Outside Directorships and Acquirer Returns 1. Introduction 31 2. Motivation 33 3. The Sample and Variables A. The Sample Selection Process 41 B. Descriptive Statistics of the Sample 42 4. Empirical Results A. Multivariate Tests 47 B. Robustness Tests 51 C. Diversifying Acquisitions 55 D. Multiple Directorships and CEO Title 57 5. Summary and Conclusions 60 References 63 About the Author

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ii List of Tables Table 1 Data Description 12 Table 2 Growth Oppor tunities, Agency Conf licts, Multiple 17 Directorships, and Firm Performance Table 3 Busy Outside Directors and Firm Performance 21 Table 4 Busy Outside Directors and Firm Performance 25 Robustness Tests Table 5 Summary Statistics 35 Table 6 Correlation 38 Table 7 Sample Di stribution 42 Table 8 Busy Outsid e Directors and Acquirer Returns 48 Table 9 Busy Outside Di rectors and Acquirer Retu rns Robustness 52 Tests Table 10 Diversifying Acquisitions 56 Table 11 S&P 500-CEO Busy and Non-Busy Outside Directors 58 Table 12 S&P 500and Non-S&P 500CEO Busy Outside Directors 60

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iii Two Essays on Multiple Directorships Chia-wei Chen ABSTRACT This dissertation includes two related ch apters that investigate the value of multiple directorships. In the first chapter, I focus on potential tradeoffs between the costs and benefits of multiple directorships held by outside directors and attempt to determine how firm characteristics affect such tradeoffs. It is widely believed that outside directors of a firm play important f unctions of monitoring and advi sing. As a result, the basic hypothesis of the first essay is that multiple directorships by outside directors can have different implications for firms that have different levels of monitoring and advising needs. Consistent with this hypothesis, the evidence suggests that firm performance is positively associated with multiple directorsh ips for firms with hi gh growth opportunities and low agency conflicts. Such firms would benefit more from be tter advising while not suffering much from less monitoring. Likewi se, firm performance is negatively associated with multiple directorships for fi rms with low growth opportunities and high agency conflicts. In the second essay, I examine how multiple directorships held by outside directors affect shareholder wealth during acquisitions. The evidence indicates that not all busy outside direct ors have the same effect a nd some types of busy outside directors may benefit the firms.

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1 Essay 1 Growth Opportunities, Agency Conflicts, and the Effectiveness of Busy Outside Directors 1. Introduction Do outside directors with multiple directorships add value to the board? Evidence has been mixed thus far. While Ferris, Jagannathan, and Pritchard (2003) find no evidence that such directors harm firm valu e, Fich and Shivdasani (2006) and Jiraporn, Kim, and Davidson (2007) suggest that multip le directorships result in ineffective monitoring and therefore reduc e shareholder wealth. In co ntrast, Harris and Shimizu (2004) find that outside directors with multip le directorships are important sources of knowledge during acquisitions. In this e ssay, we attempt to provide a possible explanation for these conflicting findings a nd demonstrate empirically the conditions under which the costs and bene fits of multiple directorships are most pronounced. Our results help to reconcile the conflicting findings in the extant literature and help to shed additional light on the on-going debate about multiple directorships. In the literature, two competing hypotheses reputation hypothesis and busyness hypothesis have been proposed concerning the eff ect of multiple directorships on firm value [see Ferris, Jagannathan, and Pritchard (2003)]. The Reputation hypothesis argues that directorships on the boards of other firms represent a reward from the labor market to a valuable director [Fama (1980) and Fama and Jensen (1983)]. As such, multiple directorships signal a directors superior talent in serving th e firms. Consistent with the

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2 reputation hypothesis, Gilson ( 1990) finds that directors w ho resigned from financially distressed firms tend to hold fewer seats on other boards followi ng their departure. Brickley, Linck, and Coles (1999) report that the likelihood of a re tired CEO serving as an outside director on other boards is posit ively related to his/her performance while being the CEO, and Coles and Hoi (2003) find that directors who re jected anti-takeover provisions are more likely to obtain additional outside directorships. The busyness hypothesis on the other hand, argues that simultaneously serving on multiple boards over-commits an individual to functions of those boards [Lipton and Lorsch (1992)]. Consequently, such individua ls are likely to have less time to attend to functions of a given board and may therefore ha ve to shirk their dire ctor responsibilities. Consistent with this view, Beasley (1996) fi nds that the likelihood of financial statement fraud is positively related to the number of directorships he ld by outside directors. Core, Holthausen, and Larcker (1999) document that boards dominated by busy outside directors are associated with excessively high levels of CEO compensation and poor firm performance. Fich and Shivdasani (2006) report a negative a ssociation between busy outside directors and firm performance. If outside directors play dual roles of mon itors and advisors for the firm [see, for example, Fama and Jensen (1983)], it seems likely that multiple directorships would have different implications for thos e two roles. Indeed, it makes se nse to suggest that outside directors with multiple directorshipsi.e., busy outside directorsmay be better at advising the firms whose boards they seat because of their perceived talent and experience, but busy outside directors may al so be less effective at monitoring firm

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3 management because of the time constraint imposed by their busyness.1 More specifically, the value of outside directorships lies not just in the signal they provide about the directors quality, but they also en able the director to enrich his or her experience as well as additional business contacts that would in turn be valuable for firm management teams and help to improve firm performance. Of course, multiple directorships also reduce the precious time avai lable for the directors to provide effective monitoring on management decisions and, thus may have a negative impact on firm performance. Therefore, whether or not mu ltiple directorships by outside directors enhance or diminish the roles of a corporat e board depends on the relative importance of advising or monitoring by outside directors. Furthermore, th is trade-off has interesting implications for the relationship between bus y outside directors and firm performance.2 In this context, although some existing evid ence suggests a negative relationship between multiple directorships and firm performance, more studies are needed to delineate between the potential costs and benefits of multiple directorships for different firms. In this essay, we provide empirical evid ence to demonstrate that the costs and benefits of multiple directorships are se nsitive to firm growth opportunities and managerial agency conflicts. The level of firm growth opportuni ties and managerial agency conflicts has interesting implications for multiple directorships because it affects 1 Previous literature attributed three functions to the board of directors: the control role, the strategic decision role [see, for example, Baysinger and Hoskisson (1990)], and the resource acquirer role [see, for example, Boyd (1990)]. The last two functions require the experience, knowledge, or expertise of directors and are less likely to create a conflict of interest with the managers. We refer to these two functions as the advisory role. Detailed review for the board of directors could be found in Johnson, Daily, and Ellstrand (1996), for example. 2 Throughout this essay, a busy outside director is regarded as an outside director with multiple directorships or at leas t three directorships.

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4 the relative importance of advising vis--vi s monitoring functions of firm boards, particularly by their outside di rectors. For firms with rela tively high growth opportunities and low managerial agency conflicts, the advising role of outside direct ors is likely to be more prominent than their monitoring role. Th erefore, all else the same, high growth (and more rapidly changing) firms are likely to bene fit more from the superior advice provided by outside directors with multiple directorsh ips, who can bring to these firms their considerable knowledge and talent, as eviden ced by their reputation in the directorship market. Busy outside directors are also like ly to be less damaging to firms with low managerial agency conflicts because such firms do not require as much monitoring of management by outside directors. On the other hand, for firms with low growth opportunities and high managerial agency co nflicts, the monitori ng role of outside directors is relatively more important while th eir advising role is less so. Thus, for these types of firms, the downside associated wi th less effective mon itoring by busy outside directors can lead to poorer firm perfor mance as management pursues its own self interests at the expense of firm shareholders. With a sample of 3,428 firm-year observations from 1998 to 2003, our empirical results are supportive of the tradeoff contentio n. In particular, our analysis documents that outside directors with three or more directorshipsbusy directorshave a significant and positive effect on the performance of firms having low agency conflicts (less need for monitoring) and high growth opportunities (greater need for advising). However, such directors are detrimental to performance of firms that have high agency conflicts (high demand for monitoring) and low growth opportunities (low demand for

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5 advising). Our findings remain qualitatively unchanged when a two-stage analysis is employed to control for the pot ential endogeneity problem or when alternative measures of firm performance, busy outside directors, growth opportunities, and agency conflicts are applied. The remainder of this essay is organized as follows. Section 2 summarizes our hypothesis development. Section 3 describe s the sample and the measures of key variables used in our analyses. Section 4 presents our empirical findings as well as additional robustness tests. S ection 5 concludes the essay. 2. Hypothesis Development Fama and Jensen (1983) suggest that out side directors add va lue to a corporate board by performing two important functions: monitoring and advising management. As monitors, outside directors having no affiliation with the firm other than their directorship should protect shareholder interests and e nhance their wealth. Consistent with the monitoring role of outside directors, Weis bach (1988) reports that the likelihood of a firms CEO being replaced after a period of poor firm performance is indeed sensitive to the proportion of outside directors on th e firms board. Uzun, Szewczyk, and Varma (2004) also report that the likelihood of corporate wrongdoing decreases when firm boards are dominated by outside directors. As advisors or providers of knowledge to management, outside directors can share their experience or business connections which can be helpful for the management team and can therefore increase the likeli hood of firm success. Dalton, Daily, Johnson,

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6 Ellstrand (1999) similarly indicate that out side directors provide constructive advice which may not be available from insiders b ecause of different perspectives by outsiders. Supporting this view, Brook and Rao (1994) fi nd evidence that outside directors are valuable to financial distress firms that adopt liability lim itation provisions. In general, empirical evidence is mixe d on the benefit of outside directors. Rosenstein and Wyatt (1990) document a positive stock price reaction surrounding the appointments of outside directors. However, Baysinger and Butler (1985), Hermalin and Weisbach (1991), Klein (1998), and Bhagat and Black (2001) find weak or no relationship between board independencedo minated by outside directorsand firm performance. Agrawal and Knoeber (1996) act ually find a negative association between the percentage of outside directors on the board and firm performance measured by Tobins q. Coles, Daniel, and Naveen (2008) also suggest additi onal value to having insiders on the boards of R&D-intensive firm s, as insider directors are knowledgeable about firm-specific investment opportunities and challenges. More recently, research has shifted the fo cus to the number of directorships held by outside directors.3 Lipton and Lorsch (1992) and Shivdasani and Yermack (1999), among others, argue that the effectiveness of monitoring by outside directors could be damaged if outside directors have too many other board appointments. Serving on 3 The inconclusive evidence on the relationship between firm performance and outside directors on the board could be the result of firm characteristics, such as firm performance [Gilson (1990)],firm size, degrees of agency conflicts, growth opportunities, [see, for example, Boone, Field, Karpoff, and Raheja (2007), Lehn, Patro, and Zhao (2005), Coles, Daniel, and Naveen (2008)], and negotiation between outside directors and the CEO [Hermalin and Weisbach (1998) and Kieschnick and Moussawi (2004)]. In addition, Agrawal and Knoeber (2001) suggest that politically experienced directors could be important on the boards of firms in which politics matters more. While there are many different aspects to the debate on the relationship between firm performance and outside directors on the board, we focus on the directorships held by outside directors. Directorships signal the value of a director and as a result could make directors different.

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7 multiple boards reduces available time an outside director can concentrate on one firm and thereby undermines the effectiveness of the directors inspection of the firms managerial decisions. On the other hand, Fa ma (1980) and Vafeas (1999) among others argue that multiple directorships by outside directors can have positive implications for the firm. Being appointed to multiple boards represents a high regard for the individuals in the labor market and likely signals superi or quality of such directors. Mace (1986) suggests that serving in multiple boards prov ides the directors with access to different management skills and business networking contacts, which could enhance their knowledge and enable them to be tter their services at different boards. Therefore, outside directors with multiple directorships could obt ain a greater diversity of experience and become valuable sources of knowledge for the firms. Moreover, since multiple directorships are positively asso ciated with firm size [Ferris, Jagannathan, and Pritchard (2003) and Fich and Shivdasani (2006)], such directors could be more capable or skillful, given the size and complexity of firm ma nagement or firm operations they oversee.4 The cost and benefit tradeoff involving multiple directorships complicate the analysis of busy outside directors. The value of advising is enriched by multiple directorships, but the role of monitoring is damaged. Thus, while Ferris, Jagannathan, and Pritchard (2003) and Fich and Shivdasani (2006) find that the likelihood for outside directors to obtain more board seats is incr easing in the performance of the firms in which they serve on their boards, the costs of multiple directorships are also observed in corporate events such as financial statem ent fraud [Beasley (1996)], CEO turnover [Fich 4 Our sample also reports a significantly positive asso ciation between firm size and multiple directorships as shown on Table 1.

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8 and Shivdasani (2006)], and acquisitions [Ahn, Jiraporn, and Kim (2008)]. Thus far, to our knowledge, there have been no studies that focus specifically on the cost and benefit tradeoff of multiple directorships.5 In particular, it is unclear that under what circumstances multiple directorships woul d add value to the board and to firm performance. Under what circumstances w ould the value of advi sing by busy outside directors outweigh the cost of less effective monitoring? And under what circumstances would multiple directorships be beneficial? We address these questions. Answers to such questions would help to shed light on the conflicting evid ence concerning the value of multiple directorships as well as to provide a better view for shareholders and/or regulators to address the importance of havi ng an outsider-dominated corporate board. As we have made clear, we view outside directors as playing important dual roles of monitoring and advising to firm management Failure to serve effectively as a monitor or an advisor compromises the function of the board and can harm firm performance. Therefore, the value of multiple directorships for a firm depends crucially on the relative importance of monitoring versus advising required of outside directors. If the need for monitoring is important for certain types of firms, outside directors with multiple directorships would be less able to provide th e necessary level of oversight. In this case, we could expect a possibly negative relations hip between multiple directorships and firm performance. In contrast, if the need for advising is relatively more important, multiple 5 Adams (2002) discusses the dual (advising and monitoring) roles of the board. In particular, he suggests the tradeoff between advising and monitoring depends on managerial ownerships and managers career concern. Adams (2003) examines board behavior and suggests that the board provides different functions (monitoring, dealing with strategic issues and considering the interests of stakeholders) in firms with different characteristics. While the advising and monitoring roles have been introduced, there is no study that looks at the linkage between multiple directorships and board functions.

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9 directorships could be benefi cial by enriching the experience, knowledge, as well as business connections for outside directors.6 In the latter case, the cost of ineffective monitoring could be offset and a positive relationship may exist between multiple directorships and firm performance. In summary, in light of the dual advising and monitoring roles of corporate boards, we propose the following hypotheses in which th e value of multiple directorships may be positive, negative, or generally indeterminate, depending on firm types. I. In firms with relatively greate r need for advising but less need for monitoring by outside directors, mu ltiple directorships should add value to board functions and therefore should be positively associated with firm performance. II.A. In firms with greater need for both advising and monitoring, the relationship between firm performance and multiple directorships is generally ambiguous. 6 Multiple directorships reduce the time for directors to provide effective monitoring and therefore make busy outside directors costly. While additional appoin tments may also reduce the time for directors to provide valuable advising, Harris and Shimizu (2004) indicate that directorships represent sources of knowledge and find that shareholder wea lth is associated with the number of directorships held by directors. In addition, our empirical evidence shows a positive association between the average directorships held by outside directors and firm performance, as shown in Table 3.

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10 II.B. In firms with less need fo r both advising and monitoring, the relationship between firm performance and multiple directorships is generally also ambiguous. III. In firms with relatively less ne ed for advising but greater need for monitoring, multiple directorships s hould hamper the effectiveness of board monitoring and therefore should be negatively associated with firm performance. 3. The Sample and Variables A. The Sample Selection Process Included in our sample are S&P 500 firm s and other publicly traded firms that have at least one billion dolla rs in total assets at the ye ar end from 1998 to 2003. We restricted our sample only to such large firm s because directors in these firms are likely to hold multiple directorships.7 For each observation, financial data must be available from the Center for Research in Secur ity Prices (CRSP) and from Compustat. Information about the board of directors must be available on the Edgar data retrieval system. Finally, utilities (SIC 4900-4949) and financial firms (SIC 6000-6999) are excluded in our sample because these firms ar e highly regulated. The criteria yield a final sample of 3,428 observations for 923 companies from 1998 to 2003. 7 This restriction allows us to comp are our results with studies such as Fich and Shivdasani (2006) in which Fortune 500 firms are applied. Not included in the tabl es, we randomly select firms that are not S&P 500 firms and have less than one billion dollars in total assets. The percentage of busy outside directors on average is about 12%. In addition, more than 50% of these relatively small firms do not have busy outside directors.

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11 B. Descriptive Statistics of the Sample The goal of this essay is to estimate the value of multiple directorships by analyzing the relationship between firm performance and multiple directorships. However, several variables could be related to firm performance as well as multiple directorships and could affect our results a bout the value of multiple directorships. We group these variables into board characteristics and firm characteristics and provide detailed description about these variables in following sections. B.1 Board Characteristics To capture multiple directorships, we employ three measures: percentage of busy outside directors, average directorships held by outside directors, and busy board indicator. These measures could also be f ound in studies such as Core, Holthausen, and Larcker (1999), Ferris, Jaga nnathan, and Pritchard (2003), Perry and Peyer (2005), and Fich and Shivdasani (2006). Outside directors are defined as busy if they serve on at least three corporate boards and a board is defined as busy if 50% or more of its outside directors are busy. In Table 1, descriptive statistics for char acteristics of our sample firms indicates that the average (median) directorships held by an out side director is 2.23 (2.14), suggesting that grouping outside directors in to busy or non-busy by three directorships separates our sample about equally into tw o sub-samples. For the percentage of busy outside directors, the average (median) is 34% (33%). The percentage of busy boards in

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12 our sample firms is about 32%. These numbers are relatively small compared with data around the early 1990s [see, for example, Fich and Shivdasani (2006)]. In addition, the average for the percentage of busy outside di rectors decreases from about 37% in 1998 to about 32% in 2003. Similarly, the percentage of busy boards in our sample decreases from about 37% in 1998 to about 26% in 2003. The likelihood of appointing a busy Table 1 Data Description Table 1 provides statistics for characteristics of our sample firms. The sample consists of 3,428 annual observations for 923 companies between 1998 and 2003. Companies are included in our sample if they are either S&P 500 firms or their total assets are at least $1 billion. Utility (4900-4949) and financial companies (6000-6999) are excluded in our sample. Outs ide directors are defined as busy if they hold at least 3 directorships. Busy board is a dummy variable. It is 1 if 50% or more than 50% of outside directors are busy and 0 otherwise. CEO busy outside directors are busy outside directors with a CEO title in another firm. Industry busy outside directors are busy outside directors with 50% or more than 50% of their directorships sharing the same 2-digit SIC code. CEO chairman is a dummy variable. It is 1 if CEO is the chairman of the board and 0 otherwise. Firm age is the number of years since the stock inclusion in the CRSP database. Operating margin is operating income divided by total assets. Tobins q is calculated as market value of common equity plus preferred stock liquidating value, plus long term debt, minus shortterm assets, plus short-term liabilities, and then scal ed by total assets. *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively. Variable Mean Median 5% 95% Correlation with busy board Board Characteristics Percentage of busy outside directors 0.34 0.33 0 0.78 0.81*** Average directorships per outs ide director 2.23 2.14 1 3.67 0.72*** Busy board (0, 1) 0.32 0 0 1 Percentage of CE O busy outside directors 0.09 0 0 0.33 0.43*** Percentage of indu stry busy outside directors 0.02 0 0 0.20 0.16*** Percentage of outside di rectors 0.64 0.67 0.29 0.90 0.09*** Board size 9.90 10 6 14 0.14*** Outside director ownership 0.01 0 0 0.04 -0.07*** CEO chairman (0, 1) 0.70 1 0 1 0.09*** CEO ownership 0.02 0 0 0.12 -0.04** CEO in the nominating committee (0, 1) 0.11 0 0 1 -0.02 Percentage of outside directors in the nominating committee 0.60 0.75 0 1 0.12*** Firm Characteristics Total assets ($ million) 8,418 2,817 1,062 28,464 0.14*** Firm age 23.4 25 4 41 0.11*** Operating margin 0.15 0.14 0.03 0.29 0.02 Governance index (Gompers et al. (2003)) 9.53 10 5 14 0.07*** Tobins q 1.65 1.11 0.37 4.61 0.03*

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13 outside director has decreas ed in recent years possibly in response to the push for stronger corporate governance [see, for example, NACD (1998)]. Other than the measures of multiple directorships, we include several variables related to board structure. Fich (2005) find evidence from Fortune 1000 firms that CEOs are sought as outside di rectors to enhance firm value. We capture the percentage of busy outside directors with a CEO title. Holding di rectorships in the same industry indicates that directors are specialized in this given industry. Howeve r, these directors could also be less distracted by demand for multiple directorships [Ferris, Jagannathan, and Pritchard (2003)]. We also add a variable the percentage of industry busy outside directors, to capture whether busy outside directors hold 50% or more of their directorships in the same i ndustry classified by 2-digit SI C code. Yermack (1996) as well as Eisenberg, Sundgren, and Wells (1998) repo rt a negative association between board size and firm value. We measure board size by the number of directors on the board. Management ownership signals the alignment of management and shareholder interests [Jensen and Meckling (1976) and Morck, Shle ifer, and Vishny (1988)]. In addition, Weisbach (1988), Baker and Gompers (2000), and Lasfer (2006) report that managers with high ownership are more likely to choose a board that is unlikely to monitor. We measure the percentage of shares held by the CEO and outside directors. While inconclusive evidence has been found for th e relationship between firm performance and CEO duality (chairman of the board and CEO are the same individual) [see, for examples, Rechner and Dalton (1991) and Daily and Da lton (1992)], CEO duality could potentially reduce the effectiveness of board monitoring. We use a dummy variable to capture the

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14 CEO duality in our sample firms. Finally, th e selection of a board member could be related to the nominating committee [Shivdasa ni and Yermack (1999)]. We include the percentage of outside directors in the nominating committee as well as a dummy variable to capture the CEO being in the nominating committee. Consistent with related studies, the mean and median of the variables described above indicate that the percentage of both CEO and industry-related busy outside directors are small. The Chairman of the boa rd and the CEO are likely to be the same individual. Both CEO ownership and outside director ownershi p are equal to or less than 2% on average. As shown in the last column of Table 1, we also capture the correlation between variables and a busy board. For board characteristics, a busy board is positively related to the percentage of CEO and industry-related busy outside directors, percentage of outside directors, board size, dual CEO, and percentage of outside directors in the nominating committee. In contrast, a busy board is negatively related to CEO ownership and outside director ownership. These re sults suggest busy out side directors are pronounced in a large board and a board domin ated by outside directors. In addition, insider ownerships which poten tially reduce agency conflicts may alter the proportion of busy outside directors. However, a positiv e relationship between the percentage of outside directors in the nominating comm ittee and a busy board casts a doubt: if busy outside directors are associated with weak corporate governance as well as weak firm performance [Fich and Shivdasani (2006)], then it is unclear why an independent nominating committee would invite thes e directors to join the board.

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15 B.2 Firm Characteristics Since we suspect that the relationship between multiple directorships and firm performance is sensitive to the need fo r advising and monitoring, we employ growth opportunities (measured by Tobins q) and mana gerial agency conflicts (measured by governance index) to proxy, respectively, the need for advising and monitoring. Tobins q, which is widely used to proxy a firms grow th opportunities, is defi ned as market value of common equity plus preferred stock liqui dating value, plus long term debt, minus short-term assets, plus short-term liabiliti es, and then scaled by total assets [Chung and Pruitt (1994)]. A higher Tobins q indicates hi gher growth opportunitie s, and vice versa. The governance index is constructed by Gompers, Ishii, and Metrick (2003); it measures the impact of 28 provisions re lated to shareholder protecti on on the bala nce of power between managers and shareholders. Although Je nsen (1986) argues th at the threat of takeover is a strong form of managerial disc ipline, a firm with hi gher governance index (i.e., more anti-takeover provisions) is expect ed to have a higher degree of managerial agency problem. To capture firm performance, we us e the operating profit margin, which is calculated as the firms operating income sta ndardized by total asse ts. In our robustness tests, additional measures, including sales scal ed by total assets, earnings per share, and market to book ratio are applied to verify our findings. Finally, firm size and firm age have been found to be related to firm grow th [Evans (1987)]. We measure firm size by total assets, in millions of dollars, and firm age by the number of years since the stocks inclusion in the CRSP database.

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16 Results in Table 1 indicate that all firm characteristics, except operating margin, are positively and significantly associated with a busy board. Cons istent with related studies, larger and older firm s are more likely to have a busy board. While the likelihood of a busy board is positively related to agency conflicts, it is also positively related to growth opportunities. The lack of a signifi cant relationship between firm performance and a busy board may reflect the opposing effect s associated with the costs and benefits of multiple directorships in the sample as a whole. In further analysis, we attempt to disentangle the costs and bene fits by looking at certain types of firms in which the relative costs and benefits may be more pronounced. 4. Empirical Results A. Univariate Tests Multiple directorships enrich the expe rience, knowledge, as well as business contacts of a director and could therefore be valuable sources of knowledge to managers. Alternatively, if managers ar e not focused on maximizing sh areholder wealth, the need for monitoring becomes more important. Mult iple directorships weaken the monitoring effectiveness of the board. Accordingly, the valu e (cost) of multiple directorships is more pronounced when the need for advising is more (less) pressingwhen growth opportunities are high (low), and when the ne ed for monitoring is less (more)when managerial agency conflicts are low (high). In Table 2, we group firms by the sample medians of growth opportunities and managerial agency conflicts. High Tobins q and low governance index firms are likely to

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17 have high demand for advising and low dema nd for monitoring, while low Tobins q and high governance index firms should have lo w demand for advising and high demand for monitoring. Within each group, we compare the operating margin for firms in which the average directorships held by out side directors is greater than 2 and for firms in which the average directorships held by outside directors is less than or equal to 2. In the group with high growth opportunities (hi gh Tobins q) and low agency conflicts (low governance index), firms with average directorships held by outside directors greater than 2 have higher operating margin in either mean or me dian than firms with average directorships Table 2 Growth Opportunities, Agency Conflicts Multiple Directorships, and Firm Performance Table 2 provides the operating margin under each group constructed by Tobins q, governance index (Gompers et al. (2003)), and average directorships held by outside directors. High (low) Tobins q and governance index indicate that the Tobins q and governance index are above (below or equal to) the sample medians. The sample consists of 3,428 annual observations for 923 companies between 1998 and 2003. Companies are included in our sample if they ar e either S&P 500 firms or their total assets are at least $1 billion. Utility (4900-4949) and financial companies (6000-6999) are excluded in our sample. Operating margin is operating income divided by total assets. Tobins q and governance index are applied to proxy growth opportunities and agency conflicts. Tobins q is calculated as market value of common equity plus preferred stock liquidating value, plus long term debt, minus short-term assets, plus short-term liabilities, and then scaled by total assets. ** and *** denote statistical significance at the 5% and 1% levels, respectively. High Tobins q & low governance index Low Tobins q & high governance index Difference t/z statistics Average directorships held by Mean 0.183 0.110 0.073*** 14.1 outside directors > 2 Median 0.186 0.115 0.071*** 13.9 N 377 546 Average directorships held by Mean 0.166 0.120 0.046*** 7.9 outside directors <= 2 Median 0.172 0.121 0.051*** 9.2 N 463 412 Difference Mean 0.017** -0.010*** Median 0.014** -0.006** N 840 958 t statistics 2.51 2.62 z statistics 2.42 2.00

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18 held by outside directors less than or equal to 2. This di fference suggests that multiple directorships add value to firm s when there is a strong need for advising but a weak need for monitoring. In contrast, in the group with low growth opportuni ties (low Tobins q) and high agency conflicts (high governance inde x), firms with average directorships held by outside directors greater than 2 have a si gnificantly lower operating margin than firms with average directorships held by outside di rectors less than or equal to 2, suggesting that multiple directorships are costly to th e firms that need more monitoring but less advising. The mean (median) difference between high growth/low agency problem firms and low growth/high agency problem firm s is 0.073 (0.071) in firms with average directorships held by outside directors grea ter than 2 compared to 0.046 (0.051) in firms with directorships held by outside directors less than or equal to 2. This evidence potentially highlights the opposite roles of mu ltiple directorships. A board dominated by outside directors with more than 2 directorships on averag e provides better advising but weak monitoring. In contrast, a board in wh ich outside directors hold no more than 2 directorships on average provides more effec tive monitoring but relatively poor advising. While these results support our hypothese s that the relationship between firm performance and multiple directorships is sensitive to the need for advising and for monitoring, the impact of advising seems comparable to the impact of ineffective monitoring on firm performance. More specifica lly, when the need for advising is strong (weak) and the need for monitoring is weak (strong), multiple directorships increase

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19 (decrease) operating margin by 0.01 (0.007) on average and by 0.005 (0.005) based on medians.8 B. Multivariate Tests Firm performance could be related to firm characteristics and other board characteristics. To address this issue, we apply multivariate analyses to control for the potential impact from such variables. In addition, the fixed-effect analysis is applied to prevent the potential problems arising from repeated observations of individual sample firms. In each regression, we include two inte ractive terms to capture the value and cost of multiple directorships. The first interaction term is the measure of multiple directorships times the (0, 1) indicator of high growth opport unities (high Tobins q) and low agency conflicts (low governance index) High (low) Tobins q or governance index is defined as above (below or equal to) the sample median of Tobins q or governance index. If the value of multiple directorships is mostly pronounced in firms with higher need for advising and lower need for monitorin g, the coefficient of this interactive term should be significantly positive. The second inte ractive term is the measure of multiple directorships times the {0, 1} i ndicator of low growth opport unities (low Tobins q) and high agency conflicts (high governance index). If the cost of multiple directorships is more pronounced in firms with higher need fo r monitoring and lower need for advising, a significantly negative coefficient for this interactive term should be observed. The 8 The mean (median) of operating margin for firms w ith high grow/ low agency problem is 0.173 (0.181). The mean (median) of operating margin for firms with low grow/ high agency problem is 0.117 (0.119).

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20 coefficient for the measure of multiple direct orships therefore represents the value (or cost) of multiple directorships in firms with higher need for both monitoring and advising (or with lower need for both monitoring and advising). According to our hypotheses developed in section 2, this coefficient could be positiv e, negative, or generally indeterminate. In regressions (1) and (3) of Table 3, we test whether multiple directorships improve firm performance by including only th e first interaction term introduced above. Multiple directorships are measured by the percentage of busy outside directors in regression (1) and the average directorships held by outside directors in regression (3). Consistent with our expecta tion, when Tobins q is high (i .e., high demand for advising) and governance index is low (i.e., low demand for monitoring), the operating margin for firms in which all outside directors are busy is about 0.025 higher than the operating margin for firms in which all outside directors are not busy. Similarly, in this case, the operating margin in firms in which outside directors hold 3 direct orships on average is about 0.014 higher than the ope rating margin in firms in which outside directors hold only 1 directorship. The relatively small co efficients for the interactive terms in regression (3) could be the result of numero us directorships held by certain outside directors. In other words, while the average directorships held by out side directors is 3, it is not necessarily true that all outside dire ctors are busy outside directors. However, the significant coefficient for th e interactive term in regr ession (3) suggests individual directorships could ha ve their own value.

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21 Table 3 Busy Outside Directors and Firm Performance Table 3 provides fixed effects regressions of operating margin and busy outside directors. The sample consists of 3,428 annual observations for 923 comp anies between 1998 and 2003. Companies are included in our sample if they are either S& P 500 firms or their total assets are at least $1 billion. Utility (4900-4949) and financial companies (6000-6999) are excluded in our sample. Dependent variable, operating margin, is calculated as operating income divided by total assets. Outside directors are defined as busy if they hold at least 3 directorships. CEO busy outside directors are bu sy outside directors with a CEO title in another firm. Industry busy outside directors are busy outside direct ors with 50% or more than 50% of their directorships sharing the same 2-digit SIC code. CE O chairman is a dummy variable. It is 1 if CEO is the chairman of the board and 0 otherwise. Firm age is the number of years since the stock inclusion in the CRSP database. Tobins q and governance index (Gompers et al. (2003)) are applied to proxy growth opportunities and agency conflicts. Tobins q is calculated as market value of common equity plus preferred stock liquidating value, plus long term debt, minus short-term assets, plus short-term liabilities, and then scaled by total assets. High (low) Tobins q and governance index indicate the Tobins q and governance index are above (below or equal to) the sample medians. The t-statistic s are reported in brackets. *, **, and *** stand for statistical significance at the 10%, 5%, and 1% level, respectively. (1) (2) (3) (4) Percentage of busy outside directors -0.017** -0.007 (-2.16) (-0.90) Average directorships held by outside directors 0.0004 0.002 (0.15) (0.87) Percentage of busy outside directors x 0.025*** 0.021*** high Tobins q & low governance index (3.24) (2.68) Percentage of busy outsid e directors x -0.028*** low Tobins q & high governance index (-3.69) Average directorships held by ou tside directors 0.007*** 0.006*** x high Tobins q & low governance index (4.47) (4.29) Average directorships held by outside directors -0.007*** x low Tobins q & high governance index (-4.89) Percentage of CEO busy outs ide directors 0.015 0.016 0.007 0.007 (1.40) (1.44) (0.65) (0.65) Percentage of industry busy ou tside directors 0.021 0.017 0.013 0.012 (1.16) (0.97) (0.73) (0.69) Percentage of outside directors 0.025** 0.024** 0.023** 0.021** (2.30) (2.23) (2.12) (1.97) Outside director ownership -0.015 -0.014 -0.012 -0.011 (-0.37) (-0.36) (-0.31) (-0.28) Log (board size) -0.015* -0.016* -0.015* -0.017** (-1.75) (-1.84) (-1.82) (-1.99) CEO chairman (0, 1) -0.0002 -0.0001 -0.0002 -0.0002 (-0.09) (-0.02) (-0.07) (0.01) CEO ownership -0.034 -0.033 -0.034 -0.032 (-1.01) (-0.99) (-1.02) (-0.97) Log (asset) 0.002 0.002 0.002 0.003 (0.45) (0.56) (0.39) (0.61) Log (firm age) -0.005 -0.003 -0.006 -0.004 (-0.46) (-0.32) (-0.57) (-0.43) Tobins q 0.007*** 0.007*** 0.007*** 0.006*** (12.4) (12.3) (12.3) (12.1) Governance index 0.001 0.001 0.001 0.002 (0.58) (0.84) (0.96) (1.61) Year (0, 1) indicators Yes Yes Yes Yes R 0.21 0.22 0.22 0.23

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22 While we observe the value of multiple directorships from firms with higher need for advising and lower need for monitoring, the coefficient for the percentage of busy outside directors in regression (1) suggest that busy outside directors could reduce operating margin in other firms. To verify that the cost of multiple directorships could be mostly pronounced in firms with low Tobi ns q (less need for advising) and high governance index (more need for monitoring ), we add a second in teractive term in regression (2) and (4) to capture the cost of multiple directorships. Coefficients of the second interaction term indicate that if Tobins q is low and governance index is high, the operating margin is 0.028 lower in firms in wh ich all outside direct ors are busy than in firms in which all outside directors are not busy. Similarly, if Tobins q is low and governance index is high, opera ting margin is about 0.014 lower in firms in which outside directors hold 3 direct orships on average than in firms in which outside directors hold only 1 directorship. These findings are consistent with our argument that the value (cost) of multiple directorships is more pr onounced in firms with higher (lower) need for advising and lower (highe r) need for monitoring.9 In addition, in firms with either lower need for both advising and monitoring or high er need for both a dvising and monitoring, multiple directorships measured by the percentage of busy outside directors in regression (2) and the average directorships held by outside directors in regression (4) provide 9 In terms of advising, the number of busy outside directors could be more important than the percentage of such directors. Not reported in ta bles, we measure multiple directorship s by the number of busy outside directors on the board. The coeffici ent for the number of busy outside directors in firms with low agency conflicts and high growth opportunities (high agency c onflicts and low growth oppor tunities) is 0.03 (-0.03) and significant at 1% level. Accordingly, the value of advising as well as monitoring could be observed when different measures of multip le directorships are applied.

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23 unclear effect in firm performance; either both advising and monitori ng are ineffective or the value of advising is offset by th e cost of less effective monitoring. Our results show that most of the cont rol variables are insignificant, but the operating margin is negatively associated with board size and positiv ely associated with the percentage of outside directors and Tobins q. The significant and positive coefficients of the percentage of outside di rectors suggest that th e operating margin is about 0.023 higher in firms in which all dir ectors are outside dire ctors than in firms without outside directors. Combined with th e value of multiple directorships, we could further conclude that the operating margin is 0.045 (i.e. 0.021+0.024) higher in firms in which all directors are busy out side directors and the need for advising (monitoring) is high (low) than in firms without outside di rector. The mean and median of operating margin in our sample are about 0.15 and 0.14, respectively, as repo rted on Table 1. An increase of 0.045 in operating margin is non -trivial economically. For the variables of ownerships, we do not find a positive relati onship between these variables and operating margin, but the negative coefficients for these variables remain insignificant in all regressions. Finally, the coefficients fo r the governance index indicate a positive relationship between agency conflicts and firm performance. However, they are relatively small and remain insignificant in all regressions. C. Robustness Tests

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24 To check the robustness of our results, we include diffe rent regression models as well as different measures of firm performance, multiple directorships, growth opportunities, and agency conflicts in our an alysis. Results are reported in Table 4. We first apply a two-stage analysis as s hown in regressions (1) and (2) in Panel A of Table 4. Multiple directorships could be the result of board characteristics as well as firm characteristics [see, for examples, Lehn, Patro, and Zhao (2005), Coles, Daniel, and Naveen (2008), Boone, Field, Karpoff, a nd Raheja (2007)]. Shi vdasani and Yermack (1999), in addition, report that the nature of appointment s to the board could be influenced by the nominating committee. We us e the percentage of outside directors in the nominating committee as well as a dummy variable, CEO in the nominating committee to instrument the percenta ge of busy outside directors.10 CEO characteristics and firm characteristics are also included in the first stage to bit regression to predict the percentage of busy outside directors for th e analysis in the second stage. While the coefficients in regression (1) indicate that the percentage of bus y outside directors is associated with the percentage of outside directors in the nominating committee as well as with several variables related to board a nd firm characteristics, our findings in Table 3 still hold in regression (2) of Table 4. The coef ficients for the two interactive terms retain the same signs and significance at the 5% le vel. In addition, the value of busy outside directors is even stronger in firms with higher need for advising and lower need for monitoring than reported in regression (2) in Table 3. 10 The correlation between the percentage of outside directors in the nominating committee and the percentage of busy outside directors is 0.24 and significant at 1% level. The correlation between the percentage of outside directors in the nominating committee and the error term in the explanatory equation is 0.002 and insignificant.

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25 In regression (3) as shown in Panel A of Table 4, we report OLS regression results for sample firms in th e first year, 1998. Similar coe fficients for th e interactive terms are obtained. In regression (4), we repl ace the percentage of busy outside directors with a busy board indicator {0, 1}. Supporting our findings the coefficients for the interactive terms in regression (4) indicate th at if the board is do minated by busy outside directors, the operating margin increases by 0.01 in firms with higher (lower) need for advising (monitoring). In contrast, if the board is dominated by busy out side directors, the Table 4 Busy Outside Directors and Firm Performance Robustness Tests Table 4 provides regression results of firm performan ce and busy outside directors with two-stage analysis and alternative measures of busy outs ide directors, firm performance, and agency conflicts. In Panel A, regression (1) and (2) represent two-stage analysis of firm performance and busy outside directors. Dependent variable in regression (1) is the percentage of busy outside directors. Regression (3) only includes observations in the first year, 1998. In regression (4) the percentage of busy outside directors is replaced by a dummy indicator, busyboard It is 1 if 50% or more than 50% of outside directors are busy and 0 otherwise. Firm performance in regression (2), (3) and (4) of Panel A is measured by operating margin. Operating margin is calculated as operating income divided by total assets. In Panel B, firm performance is measured by sales over assets in regre ssion (1), earnings per shar e in regression (2), and market to book ratio in regression (3), and operating margin in regression (4). In regression (3), Tobins q is replaced by R&D expenses scaled by total assets. In regression (4), the governance index (Gompers et al. (2003)) is replaced by He rfindahl. The sample consists of 3,428 annual observations for 923 companies between 1998 and 2003. Companies are included in our sample if they are either S&P 500 firms or their total assets are at least $1 billion. Utility (4900-4 949) and financial companies (6000-6999) are excluded in our sample. Outside directors are defined busy if they hold at least 3 directorships. CEO busy outside directors are busy outside directors with a CEO title in another firm. Industry busy outside directors are busy outside directors with 50% or more than 50% of their directorships sharing the same 2-digit SIC code. CEO chairman is a dummy variable. It is 1 if CEO is the chairman of the board and 0 otherwise. Firm age is the number of years since the stock inclusion in the CRSP database. Tobins q and R&D expenses scaled by total assets are applied to pr oxy growth opportunities. Tobins q is calculated as market value of common equity plus preferred stock liquidating value, plus long term debt, minus short-term assets, plus short-term liabilities, and then scaled by total asse ts. Governance index and Herfindahl index are applied to proxy agency conflicts. Herfindahl index is calculated by summing the squares of total sales of each firm sharing the same 2-digit SIC code divided by the square of total sales in the industry. High (low) Tobins q, governance index, Herfindahl index, and analyst coverage indicate the Tobins q, R&D scaled by total assets, governance index, and Herfindahl index are abov e (below or equal to) the sample medians. The tstatistics are reported in brackets. *, **, and *** st and for statistical signifi cance at the 10%, 5%, and 1% level,respectively.

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26 Table 4 Continue Panel A: Two-stage analysis, first-year regression, and alternative measure of busy outside directors (1) (2) (3) (4) Percentage of outside directors in the nominating 0.027** committee (2.21) CEO in the nominating committee (0, 1) -0.008 (-0.68) Percentage of busy outside directors -0.223 0.020 (-1.56) (1.48) Busyboard indicator (0, 1) -0.003 (-1.01) Percentage of busy outside directors x 0.046***0.029** high Tobins q & low governance index (4.19) (2.01) Percentage of busy outside directors x -0.025** -0.028** low Tobins q & high governance index (-2.45) (-2.08) Busyboard indicator (0, 1) x 0.010* high Tobins q & low governance index (1.92) Busyboard indicator (0, 1) x -0.012*** low Tobins q & high governance index (-2.62) Percentage of CEO busy outside directors 0.008 0.028 0.019* (0.81) (1.27) (1.93) Percentage of industry busy ou tside directors 0.015 -0.022 0.024 (0.89) (-0.64) (1.43) Percentage of outside directors 0.140***0.058** 0.024 0.032*** (4.58) (2.30) (1.60) (3.09) Outside director ownership -0.102 -0.036 -0.018 -0.030 (-0.93) (-0.84) (-0.23) (-0.78) Log (board size) 0.010 -0.013 0.025** -0.010 (0.45) (-1.50) (2.16) (-1.19) CEO chairman (0, 1) 0.006 0.001 0.015*** 0.000 (0.75) (0.40) (2.64) (-0.11) CEO ownership -0.083 -0.053 -0.012 -0.025 (-0.93) (-1.48) (-0.23) (-0.79) Log (asset) 0.069***0.016 -0.022*** -0.001 (10.6) (1.46) (-7.44) (-0.25) Log (firm age) -0.007 -0.006 0.001 -0.004 (-0.72) (-0.54) (0.21) (-0.41) Tobins q -0.002 0.006***0.031*** 0.006*** (-1.12) (10.3) (16.5) (10.9) Governance index 0.005** 0.003* 0.001 0.0002 (1.96) (1.79) (0.70) (0.15) Year (0, 1) indicators Yes Yes No Yes Chi 262 R 0.22 0.53 0.20 operating margin decreases by 0.012 in firms with lower (higher) need for advising (monitoring). In Panel B of Table 4, we replace the meas ure of firm performance by sales scaled by total assets, earnings per shar e, and market to book ratio in regression (1), (2), and (3),

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27 Table 4 Continue Panel B: Alternative measures of firm performance, growth opportunities, and agency conflicts Dependent variable Sa les/AssetsEPS MB OPM (1) (2) (3) (4) Percentage of busy outside directors 0.008 -0.198 0.020 -0.007 (0.26) (-0.69) (0.17) (-0.84) Percentage of busy outside directors x 0.082***0.594** high Tobins q & low governance index (2.84) (2.19) Percentage of busy outside directors x -0.104***-0.722*** low Tobins q & high governance index (-3.68) (-2.66) Percentage of busy outside directors x 0.347* high R&D/asset & low governance index (1.68) Percentage of busy outside directors x -0.149* low R&D/asset & high governance index (-1.71) Percentage of busy outside directors x 0.028*** high Tobins q & low Herfindahl index (3.30) Percentage of busy outside directors x -0.028*** low Tobins q & high Herfindahl index (-3.13) Percentage of CEO busy outside directors 0.094** 0.919** 0.274* 0.005 (2.34) (2.38) (1.66) (0.41) Percentage of industry busy outsid e directors -0.121* -0.171 0.093 -0.009 (-1.88) (-0.28) (0.29) (-0.45) Percentage of outside directors 0.061 1.411***0.227 0.032*** (1.50) (3.64) (1.20) (2.66) Outside director owners hip 0.100 0.439 -0.531 -0.015 (0.65) (0.31) (-1.09) (-0.33) Log (board size) 0.021 -0.556* 0.189 -0.004 (0.66) (-1.85) (1.51) (-0.45) CEO chairman (0, 1) -0.004 -0.100 -0.016 -0.001 (-0.41) (-1.03) (-0.41) (-0.27) CEO ownership 0.257** -1.746 0.407 -0.035 (2.07) (-1.47) (0.70) (-0.95) Log (asset) -0.156***0.510***-0.528*** -0.006 (-9.79) (3.42) (-5.42) (-1.19) Log (firm age) 0.078** -0.028 -0.362** -0.008 (2.03) (-0.08) (-2.43) (-0.73) Tobins q 0.013***0.065*** 0.008*** (6.67) (3.54) (13.4) R&D/asset 2.949*** (2.86) Governance index 0.004 0.085 -0.003 (0.71) (1.61) (-0.13) Herfindahl index 0.048 (0.68) Year (0, 1) indicators Yes Yes Yes Yes R 0.21 0.07 0.17 0.22 respectively. The earnings per share is be fore extraordinary items and discontinued operations. The market to book ratio is the market value of the firms equity at the end of the year plus the difference between the book value of the firms assets and the book value of firms equity at the end of the year, scaled by the firms total asset at the end of

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28 the year. Tobins q may proxy for things other than growth opportunities [Morck, Shleifer, and Vishny (1988)]. Therefore, we also replace Tobins q by R&D expenses scaled by total assets in regression (3). While the sizes of coefficients for the interactive terms are different, these coefficients remain significant and are qualitatively consistent with our earlier findings in Table 3. In regression (4) in Panel B of Tabl e 4, we replace the governance index by the Herfindahl index which is sometimes used to proxy for the degree of potential managerial agency problems.11 Consistent with our earlier results, multiple directorships measured by the percentage of busy outsi de directors enhance (reduce) operating margin in firms with higher (lower) need for a dvising and lower (higher) n eed for monitoring (as proxied by the new measures). Though not reported in th e tables, similar results are also obtained when we apply ROA and analyst coverage to proxy firm performance and agency conflicts.12 Instead of using the sample median to indicate high and low Tobins q or governance index, we separate high and low Tobins q by 1 [Lang, Stulz, and Walkling (1989)], and high and low governance index by 9 [Gompers, Ishii, Metrick (2003)]. The results, once again, are similar. Finally, board characteristics could be the result of firm performance [Gilson (1990)]. We apply the 1year lagged values of all independent variables into our analysis. The coefficients (not reported in the tables) for both 11 Hart (1983) indicates the compe tition in the product market reduces the amount of managerial slack. Jagannathan and Srinivasan (1999) empirically test the relation between product market competition and corporate agency costs and report supporting evidence. Similarly we employ Herfindahl index, also known as Herfindahl-Hirschman index, to proxy the compe tition in the product market. Herfindalh index is calculated by summing the squares of total sales of each firm sharing the same 2-digit SIC code divided by the square of total sales in the industry. 12 Financial analysts, as an information intermediary, play the role of information production and a solution to the agency problem (see e.g., H ealy and Palepu (2001)). Accordingly, a firm with low analyst coverage is expected to have high degree of agency problem.

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29 interactive terms are similarly 0.029 and -0.03 3, respectively, and remain significant at the 1% level. 5. Summary and Conclusion While previous empirical studies have highlighted the potential costs of multiple directorships [see, for examples, Beasley ( 1996), Core, Holthausen, and Larcker (1999), and Jiraporn, Kim, and Davidson (2007)], the pot ential benefits of multiple directorships have not been carefully examined. We attempt to fill this void in this essay. With a sample of 3,428 firm-year observations of 923 large U.S. public firms from 1998 to 2003, our empirical evidence supports our hypothesis that multiple directorships have both costs and benefits to the firm. Furthermore, we reexamine the relationship between multiple directorships and firm performance and we analyze how the tradeoff between the cost and benefit of mu ltiple directorships affect this relationship. More specifically, we observe that in firms with high growth opportunities (likely having greater need for advising) and low agency conflicts (likely having less need for monitoring), multiple directorships can be s ources of beneficial advising, which improves board functions and firm performance. In c ontrast, in firms with low growth opportunities (lower need for advising) and high agency c onflicts (more need for monitoring), multiple directorships can undercut effective monitori ng by outside director s and therefore can negatively affect firm performance. Although Ahn, Jiraporn, and Kims (2008) suggest that the number of directorships as a result of the directors reputation is positively associated with

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30 shareholder wealth, excess directorships have been shown to be costly. Our findings provide an additional explanation for the conflicting evidence in previous studies regarding the association between multiple directorships and firm performance. These directors could be sources of knowledge but could also be weak monitors. Not knowing what a firm needs from these directors c ould make these direct ors costly and could therefore make the board ineffective. Fina lly, our findings are in line with Ferris, Jagannathan, and Pritchard (2003) and cast a doubt for limiting the number of directorships held by outside directors.

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31 Essay 2 Outside Directorships and Acquirer Returns 1. Introduction Outside directorships signal the reputati on of a valuable director [Fama (1980) and Fama and Jensen (1983)]. Supporting this notion, researchers find evidence that the likelihood for outside directors to obtain addition board seats is related to the performance of the firm in which they se rve on the board [see Ferris, Jagannathan, and Pritchard (2003) and Fich and Shivdasani (2006)]. Simila rly, Harris and Shimizu (2004) show that multiple directorships could be im portant sources of knowledge that help to improve shareholder value during acquisitions. Ho wever, other recent studies suggest that outside directors with multiple directorships, also known as busy outside directors, serve less actively on board functions and therefore may shirk their responsibilities to protect shareholder wealth. Consistent with this hypo thesis, such directors, for example, are positively associated with the likelihood of financial fraud [Beasley (1996)] and with excessive CEO compensation [Core, Holthau sen, and Larcker (1999) ], and negatively associated with firm performance [Fich and Sh ivdasani (2006)]. While the debate on the value of busy outside directors focu ses on two competing hypotheses, the reputation and the busyness hypotheses [see Ferris, Jagannathan, and Pritc hard (2003)], there is limited research examining the link between shareh older wealth and the characteristics of individual busy out side directors.

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32 Agrawal and Knoeber (2001) suggest that politically experienced directors could be relatively important on the boards of firm s in which politics matters more. Defond, Hann, and Hu (2005) report th at financial expertise on audit committees improves corporate governance and enhances shareh older value. Fich (2005) finds that shareholders react positively to director appo intments when the appointees are CEOs of other firms. Potentially, individual directors with different occupa tions, experience, or expertise, could have specialized knowledge and make different contributions to the firm.13 Thus, the association between busy out side directors and shareholder value creation could depend on the characteristics of individual busy outside directors. In this study, we provide additional evidence on the value of busy outside directors by examining their infl uence on wealth gains in mergers and acquisitions. With a sample of 854 acquisitions from 1998 to 2004, we find busy outside directors are not all the same. Although busy outside directors in general are negativel y associated with acquirer returns during the announcement of ac quisitions, those with a CEO title in an S&P 500 firm and those with outside director ships in different industries do not have a similar negative association. In addition, our results indicate that multiple directorships do not reduce the value of outside directors who have a CEO title in an S&P 500 firm. Although we do not find that busy outside direct ors with directorship (s) in the targets industry improve acquirer returns, our result s suggest that multiple directorships in different industries and management experi ence in relatively large firms make busy outside directors valuable s ources of knowledge. Our results, therefore, suggest that the 13 In contrast, Klein (1998) reports that firm performance is not sensitive to the outside directors occupation.

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33 different characteristics of i ndividual busy directors can ha ve different effects on firm value. These findings may help to explain the conflicting relations hips between firm value and busy outside direct ors found in previous studies. The remainder of this essay is organized as follows. Section 2 introduces our research questions. Section 3 describes our sample selection proc ess, data sources, variables, and the summary stat istics of these variables. Em pirical results and robustness tests are reported in Section 4. Section 5 conclude s this essay. 2. Motivation Acquisitions are major investments that can potentially change the strategic direction of the firm and significantly affect the wealth of its shareholders. However, it has been argued in the literature that ac quisition decisions coul d result from potential conflicts of interest between mangers and shareholders [J ensen and Meckling (1976)]. Indeed, available empirical evidence sugge sts that managers may not always make acquisitions with the purpose of maximizing shareholder wealth. Morck, Shleifer, and Vishny (1990), for example, argue that mana gers may extract private benefits at the expense of firm shareholders. Malmendier and Tate (2003) re port that corporate investment decisions may have been driven by CEO hubris or overconfidence. In this context, independent outside directors play an important role in monitoring managements investment decisions, so as to mitigate managerial agency conflicts and protect shareholder interests [see, for exam ples, Byrd and Hickman (1992) and Cotter, Shivdasani, and Zenner (1997)].

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34 Fama (1980) and Fama and Jensen (1983) suggest that if labor markets are efficient, directors of well-performing firms are likely to be rewarded with additional directorships. Ferris, Jagannathan, and Pritc hard (2003) and Fich and Shivdasani (2006) empirically test the relation between direct ors additional outside appointment and the performance of the firm in which the di rector is on the board and find supporting evidence. Thus, outside directors with multiple directorships can be viewed as likely having superior talent in serving as a director and in e nhancing board functions as well as shareholder value. With this in mind, severa l studies measure a di rectors value by the number of directorships the director holds [see, for exam ple, Shivdasani (1993) and Vafeas (1999)]. However, other studies, such as Beasley (1996), Core, Holthausen, and Larcker (1999), and Fich and Shivdasani ( 2006), argue that multiple directorships could lower the effectiveness of monitoring since busy directors may not have the time to carefully scrutinize managerial activities. Thus, busy direct ors may be associated with lower firm value. Thus far, the debate on the value of busy outside directors has mainly focused on the number of directorships they hold. Left unexplored is how the ch aracteristics of busy outside directors may have different effects on firm performance. Indeed, there is no reason why the impact of busy outside direct ors who have different occupational or job experiences should necessarily be the same. For instance, industry directors, those who have a majority of their di rectorships in the same indus try and therefore potentially specialize in the industry [Fe rris, Jagannathan, Pritchard (2 003)] could be quite different from those who serve in boards of different industry firms. If outside directorships

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35 provide directors with valuable knowledge and information on different management skills and business network contacts [see, fo r examples, Mace (1986), Rosenstein and Wyatt (1994), Booth and Deli (1996), Carpenter and West phal (2001) and Loderer and Peyer (2002)], then outside di rectors with multiple director ships in different industries (we will call them non-industry busy outside dir ectors) could obtain a greater diversity of experience and consequently co uld become more valuable so urces of knowledge for the firm. Table 5 Summary Statistics Table 5 reports summary statistics for each variable in Panel A and the distribution of busy outside directors in firm level and director level in Panel B. The percentage for firm level in Panel B represents the percentage of firms in our sample with specific busy outside directors and is calculated as N divided by 854 (number of acquiring firms). For example, 68.7% for busy outside directors indicates 68.7% of our sample acquiring firms have at least 1 busy outside directors. The percentage for director level in Panel B represents the percentage of total outside directors in our sample w ith specific characteristic and is calculated as N divided by 4,913 (number of outside directors). For example, 31.7% for busy outside directors indicates 31.7% of our sample outside directors are busy outside directors or have at least 3 directorships. The sample consists of 854 acquisitions from 1998 to 2004. CAR (-1, 1) and CAR (-2, 2) are equal-weighted three-day and five-day cumulative abno rmal returns in percentage points calculated using the market model. Outside directors are defined as busy if they hold three or more directorships. Industry busy outside directors are busy outside directors with at least 50% of their directorships sharing the same 2digit SIC code. Non-industry busy outside directors are busy outside directors with all outside directorships in other industries classified by 2-digit SIC code. SP500-CEO (Non-SP500-CEO) busy outside directors are busy outside directors with a CEO title in a S&P 500 (non-S&P 500) firm. Non-SP500 busy outside directors are busy outside directors not current employees or directors of S&P 500 firms. Board size measures the number of directors. Acquirers pre-announcement stock price run-up is acquirers buy-andhold abnormal return during the period (-210, -11) with the CRSP value-weighted market index as the benchmark. Free cash flow is calculated as operating income before depreciation minus interest expenses, income taxes, and capital expenditures scaled by book value of total assets. Leverage is the book value of long-term debts and short-term debts over market value of total assets. Tobins q is calculated as market value of common equity plus preferred stock liquidating value, plus long term debt, minus short-term assets, plus short-term liabilities, and then scaled by total assets. Relative deal size is deal value over acquirers market capitalization. Market capitali zation, measured in millions, is calculated as the number of shares outstanding multiplied by the stock price at the year end prior to announcement date. Diversifying acquisitions are acquisitions in which acquirers and targ ets do not share a 2-digit SIC code. Intrastate is a dummy indicator and is 1 if acquirer an d target are in the same state. The t -statistics is reported in parenthesis. *, **, and *** stand for statistical significance based on two-sided tests at the 10%, 5%, and 1% level, respectively.

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36 Table 5 Continue Panel A: Summary statistics Variable Mean Median 5% 95% Abnormal returns: CAR (-1, 1) -1.88 -1.01 -14.3 8.15 CAR (-2, 2) -1.72 -1.20 -15.1 9.84 Board characteristics: Percentage of outside directors 0.63 0.67 0.29 0.90 Percentage of busy outside directors 0.33 0.33 0 0.80 Percentage of industry busy outside directors 0.03 0 0 0.22 Percentage of non-industry busy outside directors 0.10 0 0 0.38 Percentage of SP500-CEO busy outside directors 0.06 0 0 0.30 Percentage of non-SP500-CEO busy outside directors 0.02 0 0 0.17 Percentage of non-SP500 busy outside directors 0.11 0 0 0.40 Average directorships of outside directors 2.23 2.17 1 3.80 Board size 9.90 10 6 15 CEO chairman 0.70 1 0 1 Inside ownership 0.06 0.01 0 0.24 Acquirer characteristics: Acquirers market capita lization 26,114 5,473 415 146,135 Acquirers pre-announcement stock price run-up 0.18 0.07 -0.43 1.07 Free cash flow 0.08 0.08 -0.02 0.20 Leverage 0.16 0.12 0 0.42 Total assets 20,133 4,385 488 50,409 Tobins q 2.14 1.39 0.40 6.02 Deal characteristics: All-cash deal 0.29 0 0 1 Diversifying acquisitions 0.40 0 0 1 Intrastate 0.19 0 0 1 Relative deal size 0.24 0.09 0 1.04 Tender offer 0.24 0 0 1 Panel B: Busy outside directors Firm level Director level N % N % Busy outside directors 587 68.7 1,556 31.7 Industry busy outside directors 99 11.6 143 2.9 Non-industry busy outside directors 338 39.6 561 11.4 SP500-CEO busy outside directors 243 28.5 464 9.4 Non-SP500 busy outside directors 394 46.1 497 10.1 In our sample of 854 acquisitions fro m 1998 to 2004, as shown on Panel B of Table 5, about 70 percent of acqui rers have at least one busy outside director. More than 10 percent of these acquirers have industry bus y outside director(s) (i .e. at least 50% of directorships sharing the same 2-digit SIC code) and about 40 percent of these acquirers have non-industry busy outside director(s). Among our total sample of 4,913 outside directors, only about 3 percent of these direct ors have a majority of their directorships in the same industry while about 10 percent of these directors have all their outside

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37 directorships in other industries. The numb er of non-industry busy outside directors is over one-third of the number of busy outside directors. In addition, according to the correlations reported in Table 6, the percentage of non-industry busy outside direct ors are positively associated with the percentage of outside directors but this asso ciation is not observed between the percentage of outside directors and the percentage of industry busy outside director s. Furthermore, industry and non-industry busy outside directors are negatively related to se veral firm characteristics. For example, the percentage of industry bus y outside directors is associated with low agency conflicts (i.e. low governance index) young firms, and firms with high growth opportunities (i.e. high Tobins q). In cont rast, the percentage of non-industry busy outside directors is associat ed with high agency conflicts (i.e. high governance index), low inside ownership, old firms, and large firms. Potentially, industry and non-industry busy outside directors c ould have different impact on sh areholder value. Thus, our first research question is whether industry or non-i ndustry busy outside directors adds value to acquiring firms during the acquisition announcements. Directors from large firms or directors who are CEOs of large firms are more likely to receive additional directorships [Fe rris, Jagannathan, and Pritchard (2003)]. The size and complexity of the opera tions in large firms suggests that these directors may be more skillful and may provide broader networ king contacts to firms in which they serve on their boards. Similarly, Fama and Jensen (1 983) indicate that serving as directors on other boards could signal the executive s competence. Kaplan and Reishus (1990), Shivdasani (1993), and Brickley, Linck, and Coles (1999) among others offer empirical

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38 evidence to support this noti on. Fich (2005) further finds a positive shareholder reaction to the appointment of outside directors who ar e CEOs of other firms. With this in mind, the value of a direct ors skills and networ king contacts may be even more pronounced if the director is also the CEO of an S&P 500 firm which tends to be a leader in its industry [see Cai (2007)]. Since directors with CEO titles in S&P 500 firms are likely to be attractive candidates for other boa rds, do these directors lead to better firm performance than do other busy outside directors who ar e not S&P 500 firm CEOs? Furthermore, do multiple directorships add valu e to outside directors with CEO titles in S&P 500 firms? Do busy outside directors with a CEO title in a S&P 500 firm differ from busy outside directors with a CEO title in a non-S&P 500 firm? As shown on Panel B of Table 5, about tw o thirds of busy outside directors have either directorship(s) or CEO title(s) in S&P 500 firm(s) and one third of busy outside directors (9.4 percent of out side directors) having a CEO title in an S&P 500 firm. NonS&P500 busy outside directors ar e about 10 percent of total outside directors in our Table 6 Correlation The sample consists of 854 acquisitions from 1998 to 2004. Outside directors are defined as busy if they hold three or more directorships. Industry busy outside directors are busy outside directors with at least 50% of their directorships sharing the same 2-digit SIC code. Non-industry busy outside directors are busy outside directors with all outside directorships in other industries classified by 2-digit SIC code. SP500CEO busy outside directors are busy outside directors with a CEO title in a S&P 500 firm. Non-SP500 busy outside directors are busy outside directors not current employees or directors of S&P 500 firms. CAR (-2, 2) is the equal-weighted five-day cumulative abnormal return in percentage points calculated using the market model. Governance index is constructed by Gompers, Ishii, and Metrick (2003). Firm age is the number of years since the stock inclusion in the CRSP database. Tobins q is calculated as market value of common equity plus preferred stock liquidating value, plus long term debt, minus short-term assets, plus short-term liabilities, and then scaled by total assets.

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39 Table 6 Continue Percentage of outside directors Percentage of busy outside directors Percentage of industry busy outside directors Percentage of nonindustry busy outside directors Percentage of SP500CEO busy outside directors Percentage of nonSP500 busy outside directors CAR (-2, 2) Governance index Inside ownership Firm age Total assets Percentage of busy outside directors 0.281 (0.00) Percentage of industry busy outside directors -0.040 0.225 (0.32) (0.00) Percentage of non-industry busy outsid e directors0.216 0.627 -0.081 (0.00) (0.00) (0.04) Percentage of SP500-CEO busy outside di rectors0.247 0.562 0.011 0.522 (0.00) (0.00) (0.78) (0.00) Percentage of non-SP500 busy outside dir ectors 0.070 0.487 0.336 0.035 -0.052 (0.08) (0.00) (0.00) (0.38) (0.20) CAR (-2, 2) 0.049 0.001 -0. 025 0.070 0.093 -0.061 (0.22) (0.98) (0.53) (0. 08) (0.02) (0.13) Governance index 0.274 0.058 -0.086 0.093 0.023 0.041 -0.001 (0.00) (0.17) (0.04) (0.03) (0.59) (0.33) (0.98) Inside ownership -0.307 -0.099 -0. 040 -0.095 -0.094 0.038 0.004 -0.145 (0.00) (0.01) (0.32) (0.02) (0 .02) (0.34) (0.92) (0.00) Firm age 0.303 0.164 -0.154 0.233 0.206 -0.088 0.075 0.322 -0.271 (0.00) (0.00) (0.00) (0.00) (0.00) (0.03) (0.06) (0.00) (0.00) Total assets 0.042 0.178 -0.058 0.201 0.128 -0.037 0.008 -0.094 -0.053 0.068 (0.29) (0.00) (0.15) (0.00) (0.00) (0.35) (0.84) (0.03) (0.18) (0.09) Tobins q -0.035 0.126 0.085 0.037 0.161 0.017 0.039 -0.184 -0.007 -0.128 -0.060 (0.38) (0.00) (0.03) (0.36) (0.00) (0. 68) (0.33) (0.00) (0 .87) (0.00) (0.13)

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40 sample and about one third of total busy ou tside directors. While this evidence is consistent with the notion that multiple directorships are large firm phenomenon [see Ferris, Jagannathan, and Pritchard (2003) and Fich and Shivdasani (2006)], the characteristics of busy outside directors with a CEO title in an S&P 500 firm (we will call them SP500-CEO busy outside directors) are similar to non-industry busy outside directors as shown in Table 6, except that the percentage of SP500-CEO busy outside directors is associated w ith high growth opportunitie s (i.e. high Tobins q). The percentage of non-SP500 busy outside directors, in contrast, is not significantly related to governance index, inside ownership, total asse ts, or Tobins q. However, similar to the percentage of industry busy out side directors, the percen tage of non-SP500 busy outside directors is negatively associat ed with firm age. Once again, busy outside di rectors could be different and the differe nce could have different im pacts on shareholder wealth. Previous studies find that diversifying acquisitions te nd to destroy shareholder wealth [see, for example, Morck, Shleifer, an d Vishny (1990)]. Bu sy outside directors with directorship(s) in the target industry could potentially protect shareholder interests by accurately evaluating the target, given thei r experience in the target industry, thereby preventing value-reducing ac quisitions by management. Thus, these industry busy outside directors could be different and c ould have a different implication for the relationship between shareholder value and busy outside directors. In short, we examine in this essay whether different types of busy directors may ha ve different effects on firm value and we capture the characteristics of bus y outside directors from a perspective that has not been done before.

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41 3. The Sample and Variables A. The Sample Selection Process Examining acquirer returns around acqui sitions sidesteps the potential endogeneity problem and allows us to observe wh ether outside directors play their role to protect shareholder interests when there are potential agency conflicts between managers and shareholders. We first obtain a sample of acquisitions from the Securities Data Corporations (SDC) data. Shareholder reaction to acquisitions could be different based on the targets public status because the choice between a public and a private target could be related to the acquirers managerial motive [see Jensen (1986), Roll (1986), and Moeller, Schlingemann, and Stulz (2004)], the availabili ty of target information [Chang (1998)], or target bargaining power [Ang and Kohers (2001)]. Because thes e factors potentially bias our analyses in the relationship between busy outside directors and acquirer returns, we exclude private targets from our sample. Observations in our sample must meet the following criteria: (1) The announcement date is between 1998 and 2004; (2) the acquirer controls less than 50% of the shares of the target at the announcement date and controls 100% of the shares after the transaction; (3) the deal value is at le ast $1 million; and (4) data on acquirer stock prices, accounting variables, and director information are available from CRSP, COMPUSTAT, and EDGAR data retrieval syst em, respectively. Following these criteria,

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42 we obtain a sample of 854 firm-year acqui sitions made by 476 acquirers. Within 854 observations, 299 are diversifying ac quisitions made by 200 acquirers. Table 7 reports the sample distribution by announcemen t year. Consistent with related studies, the number of acquisitions in creased at the end of 1990s (beginning in 1998) and then dropped year by year to 2002. In 2003 and 2004, the number of acquisitions increased about 16% from 67 to 78, and about 20% from 67 to 81, respectively. Similarly, the medians of market capitalization (calculated as the number of shares outstanding multiplied by the stock pr ice at the year end prior to announcement date) and deal value (calculated as the valu e of transaction, excluding fees and expenses) are relatively high around 2000. However, wh ile the medians of acquirer market capitalization remain low in recent years, the me dians of deal value and relative deal size increase in both 2003 and 2004. Table 7 Sample Distribution The sample consists of 854 acquisitions from 1998 to 2004. Market capitalization is calculated as the number of shares outstanding multiplied by the stock price at the year end prior to announcement date. Deal value is the value of transaction, excluding f ees and expenses. Both market capitalization and deal value are measured in millions. Relative deal size is deal value over acquirers market capitalization. Year Number of acquisitions Percentage of sample Median acquirer market capitalization Median deal value Median relative deal size 1998 166 19.4 5,542 301 0.09 1999 188 22.0 6,405 402 0.08 2000 155 18.1 6,652 453 0.09 2001 119 13.9 6,013 182 0.06 2002 67 7.8 4,121 149 0.05 2003 78 9.1 3,342 281 0.11 2004 81 9.5 3,487 528 0.11 B. Descriptive Statistics of the Sample B.1. Board Characteristics

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43 Outside directors are defined as directors without any affiliation with the firm. As in other related studies, board members in our sample firms are dominated by outside directors. The average (median) percentage of busy outside directors is a bout 33 percent. It is smaller than the 52 percent reported by Fich and Shivdasani (2006) because our sample is not restricted to large firms. Outs ide directors are defined as being busy if they hold at least three directorships. To capture the differences among busy out side directors, we focus on the industry characteristics and large firm characteristics of outside directorship s held by busy outside directors. Industry busy outside directors are busy outside directors with at least 50 percent of their dire ctorships in firms sharing the sa me 2-digit SIC code [Ferris, Jagannathan, and Pritchard (2003)]. 14 These directors potentially ha ve superior talent in a given industry. In contrast, nonindustry busy outside direct ors are busy outsi de directors with all outside directorships in other indu stries, who may have a great diversity of experience. In addition, these di rectors are associated with la rge firms and could be more skillful due to the complexity of operations th ey oversee. Table 5 indicates that more than 50 percent of acquirers do not have these di rectors and both the average and median percentages of industry a nd non-industry busy outside directors are small. The variable that captures large firm ch aracteristics of busy outside directors percentage of SP500-CEO busy ou tside directorsis the percen tage of outside directors who have at least three directorships and w ho also have a CEO title in an S&P 500 firm. 14 Ferris, Jagannathan, and Pritchard (2003) and Fich and Shivdasani (2006) include industry directors, not restricted to outside directors, as a dummy variable for their analysis of the association between firm performance and multiple directorships.

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44 The variable, percentage of non-SP500 busy out side directors, captu res the busy outside directors without either a CE O title or directorship(s) in an S&P 500 firm(s). These two variables allow us to examine if experience from serving on the board of a large firm and experience from managing a large firm add va lue to busy outside directors. In addition, we also capture busy outside directors with a CEO title only in a non-S&P 500 firm to see whether these directors are different from SP500-CEO busy outside directors. As shown in Panel A of Table 5, the percenta ge of SP500-CEO busy out side directors and the percentage of non-SP500 busy outside dire ctors comprise more than 50 percent of busy outside directors, while the rest of the busy outside directors have directorships in S&P 500 firms but do not have a CEO title in an S&P 500 firm. The lower percentage of non-SP500-CEO busy outside directors suggests that directors with a CEO title in an S&P 500 firm could be more attractive as board members than busy outside directors with a CEO title in a non-S&P 500 firm. The average (median) number of director ships held by outside directors in our sample is about 2.23 (2.17). Other than outside directors and director ships held by outside directors, we employ three control variables which potentially affect shareholder value. Yermack (1996) and Eisenberg, Sundgren, and Wells (1998) report a negative association between board size and firm value. We meas ure board size by the number of directors on the board. Management ownership signals the alignment of management and shareholder interests [Jensen and Meckling (1976) an d Morck, Shleifer, an d Vishny (1988)]. We capture this effect by measuring the percentage of shares held by firm insiders. While the evidence on the relationship between firm performance and CEO duality is generally

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45 mixed [see, for examples, Rechner and Da lton (1991) and Daily and Dalton (1992)], being a dual CEOthe CEO is also the chairman of the boardcould reduce the effectiveness of board monitoring. We use a CEO chairman indicator to capture CEO duality, which is 1 if the CEO is also the chairman and is 0 if otherwise. B.2 Abnormal Returns To measure acquirer returns, we compute both three-day (-1, 1) and five-day (-2, 2) cumulative abnormal returns (CARs) during the acquisition announcement period. From a random sample, Fuller, Netter, and Stegemoller (2002) report that about 92.6 percent of announcement dates from SDC are accura te and the rest are within at most two days of the actual announcement dates. Ther efore, five-day CARs potentially capture most announcement effect during acquisitions. We use the CRSP equal-weighted return as the market return and estimate the ma rket model parameters over the period from event day -210 to event day -11. As shown on Panel A of Table 5, the average (median) five-day CARs is -1.72 (-1.20), similar to the CARs reported by Masulis, Wang, and Xie (2007) for acquisitions of public targets. B.4. Control Variables Acquirer returns could be affected by se veral other factors. Accordingly, we control for acquirer and deal characteristic s in our regressions and provide summary statistics for these variables in Table 5. For acquirer characteristics, Moeller, Schlingemann, and Stulz (2004) report a negative association between acquirer

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46 announcement returns and bidder size. We m easure bidder size by market capitalization, measured as the number of shares outstandi ng multiplied by the stock price at the year end prior to announcement date We calculate Tobins q as market value of common equity plus preferred stock liq uidating value, plus long-term debt, minus short-term assets, plus short-term liabilities, and then scaled by total assets [Chung and Pruitt (1994)]. Variable values for Tobins q are at the y ear end prior to announcement date. While free cash flow may exacerbate the conflict of inte rest between shareholders and managers, debt may prevent firms from wasting resour ces [Jensen (1986)]. We calculate free cash flow as operating income before depreciation minus interest expenses, income taxes, and capital expenditures scaled by book value of to tal assets. Financial leverage is the book value of long-term debt and short-term debt over market value of to tal assets. Finally, we control for acquirer pre-announcement stock pr ice run-up measured as the acquirers buyand-hold abnormal return from event day 210 to event day -11 with the CRSP valueweighted market index as the benc hmark to proxy firm performance. Deal characteristics include method of payment, relative deal size, and indicators of intrastate, diversifying acquisition, and tender offer. Travlos (1987), Servaes (1991), and Brown and Ryngaert (1991) among others have found that the method of payment affects acquirer returns. We use a cash deal indicator to capture payment method, which is 0 if the acquisition is financed partially or fully with stock and is 1 if otherwise. Morck, Shleifer, and Vishny (1990) suggest that dive rsifying acquisitions co uld benefit managers at the expense of shareholders. We define a diversifying acquisition as one in which the acquirer and the target do not share the same 2-digit SIC code. Relative deal size may

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47 also affect acquirer returns during acqui sitions [Moeller, Schlingemann, and Stulz (2004)]. We calculate relative deal size as th e deal value of acquire r market capitalization at the year end prior to the acquisition. Fi nally, geographical distance between the acquirer and the target may proxy for the av ailability of inform ation, and we use an intrastate indicator to capture acquisitions in which acquirers and targets are within the same state. As shown in Table 5, most acquisitions in our sample are financed with stock. About 40 percent are diversifyi ng acquisitions. Tender offers comprise 24 percent in our sample, and about 20 percent of acquisitions involve acquirers and targets within the same state. 4. Empirical Results A. Multivariate Tests In Table 8, we apply OLS regression to test the relations hip between acquirer returns and busy outside direct ors. The dependent variable is the five-day cumulative abnormal return [CARs (-2, 2)]. In regression (1), we first test the relationship between busy outside directors and acquire r returns without considering the characteristics of busy outside directors. Consistent with Ahn, Jiraporn, and Kim (2008), we find that acquirer returns are negatively associated with the per centage of busy outside directors, suggesting that multiple directorships reduce the effectiveness of monitoring by outside directors [Fich and Shivdasani (2006)]. However, when variables indicating th e characteristics of busy outside directors are added into regressions, we find that some types of busy outside directors are differently associ ated with acquirer returns. In regression (3), for example,

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48 the coefficient for the percen tage of non-industry busy outs ide directors suggests that these busy outside directors do not reduce acqui rer returns. While a one percent increase of busy outside directors reduces five-day CARs by about 0.05 percentage points, if the increased busy outside directors are non-indu stry busy outside directors, the reduced CARs could be recovered and the total imp act from non-industry busy outside directors on acquirer returns is not different from non-busy outside direct ors (i.e. 0.046 percent increase in five-day CARs). The coefficient for the percentage of SP500-CEO busy outside directors, as shown in regression (4), suggests that busy outside directors with a CEO title in an S&P 500 firm are not associated wi th negative acquirer returns. One percentage increase of Table 8 Busy Outside Directors and Acquirer Returns The sample consists of 854 acquisitions from 1998 to 2004. The dependent variable is the acquirers equalweighted five-day (-2, 2) cumulative abnormal return in percentage points calculated using the market model. Outside directors are defined as busy if they hold three or more directorships. Industry busy outside directors are busy outside directors with at least 50% of their directorships sharing the same 2-digit SIC code. Non-industry busy outside directors are busy outside directors with all outside directorships in other industries classified by 2-digit SIC code. SP500-CEO busy outside directors are busy outside directors with a CEO title in a S&P 500 firm. Non-SP500 busy outside directors are busy outside directors not current employees or directors of S&P 500 firms. Board size measures the number of directors. Acquirers preannouncement stock price run-up is acquirers buy-and-hold abnormal return during the period (-210, -11) with the CRSP value-weighted market index as the be nchmark. Free cash flow is calculated as operating income before depreciation minus interest expenses, in come taxes, and capital expenditures scaled by book value of total assets. Leverage is the book value of long-term debts and short-term debts over market value of total assets. Tobins q is calculated as market value of common equity plus preferred stock liquidating value, plus long term debt, minus short-term assets, plus short-term liabilities, and then scaled by total assets. Relative deal size is deal va lue over acquirers market capita lization. Market capitalization, measured in millions, is calculated as the number of shares outstanding multiplied by the stock price at the year end prior to announcement date. Diversifying acquisitions are acquisitions in which acquirers and targets do not share a 2-digit SIC code. Intrastate is a dummy indicator and is 1 if acquirer and target are in the same state. The t -statistics is reported in parenthesis. *, **, and *** stand for statistical significance based on two-sided tests at the 10%, 5%, and 1% level, respectively.

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49 Table 8 Continue Variable (1) (2) (3) (4) (5) Percentage of busy outsid e directors -3.719** -3.553** -5.426*** -5.271*** -2.603* (-2.38) (-2.47) (-2. 78) (-3.01) (-1.69) Percentage of industry busy outside directors -1.439 (-0.24) Percentage of non-industry busy outside 5.726** directors (2.16) Percentage of SP500-CEO busy outside 8.034** directors (2.40) Percentage of non-SP500 busy outside -3.267 directors (-1.19) Percentage of outside director s 4.695* 4.596* 4.623* 4.300* 4.659* (1.90) (1.87) (1.88) (1.74) (1.89) Log (board size) 0.602 0.564 0.518 0.523 0.535 (0.41) (0.40) (0.36) (0.36) (0.37) Log (inside ownership) 0.523 0.511 0.503 0.560 0.545 (1.42) (1.40) (1.38) (1.53) (1.48) CEO chairman -0.663 -0.672 -0.698 -0.660 -0.657 (-0.88) (-0.89) (-0. 93) (-0.88) (-0.88) Acquirers pre-announcement stock price -3 .394***-3.404***-3.412*** -3.429*** -3.450*** run-up (-3.65) (-3. 70) (-3.65) (-3.67) (-3.71) Free cash flow -5.492 -5.674 -5.850 -5.718 -5.613 (-0.44) (-0.47) (-0. 47) (-0.46) (-0.45) Leverage 3.240 3.103 3.399 3.667 3.176 (0.89) (0.89) (0.93) (0.99) (0.87) Log (total asset) 0.285 0.273 0.193 0.236 0.224 (1.13) (1.12) (0.78) (0.94) (0.88) Log (firm age) -0.185 -0.202 -0.246 -0.236 -0.241 (-0.36) (-0.40) (-0. 48) (-0.47) (-0.48) Tobins q 0.414** 0.416** 0.438** 0.398** 0.405** (2.30) (2.33) (2.45) (2.20) (2.24) Intrastate 0.931 0.952 0.968 0.914 0.958 (0.86) (0.88) (0.90) (0.85) (0.89) Relative deal size -3.416***-3 .420***-3.303*** -3.369*** -3.358*** (-3.08) (-3.08) (-3. 04) (-3.05) (-3.07) All-cash deal 1.849***1. 853***1.844*** 1.767*** 1.771*** (2.72) (2.72) (2.73) (2.61) (2.60) Diversifying acquisitions -0.785 -0.786 -0.745 -0.751 -0.773 (-1.14) (-1.14) (-1. 09) (-1.10) (-1.13) Year dummies Yes Yes Yes Yes Yes R 0.14 0.14 0.15 0.15 0.14 busy outside directors with a CEO title in an S&P 500 firm potentially recovers the negative acquirer returns caused by multiple directorships held by busy outside directors, and in fact increases acqui rer returns by about 0.03 percen tage points [i.e. 0.08 + (-0.05)] although this positive return is not significantly different from zero. However, similar to non-industry busy outside direct ors, SP500-CEO busy outside di rectors are not different

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50 from non-busy outside direct ors and also improve acqui rer returns by about 0.04 percentage points.15 For industry busy outside directors a nd non-SP500 busy outside directors, as shown respectively in regression (2) and (5), we do not find positive or significant coefficients for these variables, suggesting that these busy outside directors are not different from most busy outside directors. A one percent increase of industry or nonSP500 busy outside directors could reduce acquirer returns by 0.04 or 0.03 percentage points, respectively. Although the coefficien ts for the percentage of busy outside directors are different in regression (2) and (5) because of the potential difference between industry and non-SP500 busy outside di rectors, the differen ce is not significantly different from zero. Combining the results from all regressi ons reported in Table 8, we see that while busy outside directors are negativ ely associated with five-day CARs during acquisitions, not all busy outside director s are the same. Non-industry busy outside directors and SP500-CEO busy out side directors are associ ated with more outside directorships, directorships in different industries, and di rectorships in large firms. Potentially, these directors with their great diversity of experience could be valuable source of knowledge to the firms in which th ey serve on their boards. However, while we 15 While the coefficient of the percentage of SP500-CEO busy outside directors in regression (4) is greater than the coefficient of the percentage of non-industry busy outside directors in regression (3), the difference between these two coefficients is not significantly different from zero. Although the correlation between non-industry busy outside directors and SP500-CEO busy outside directors as shown on Table 2 is 0.522 and significant, indicating busy outside directors w ith a CEO title in S&P 500 firms are likely to hold directorships in different industries and vice versa, our results still hold when we drop acquirers with both types of busy outside directors. Among 1,556 busy outside directors, 221 busy outside directors are nonindustry busy outside directors and in the meantime have a CEO title in S&P 500 firms. Among 854 acquirers, 193 acquirers have both non-industry busy outside directors and SP500-CEO busy outside directors.

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51 find these directors could be better than othe r busy outside directors, we do not find the evidence that these directors are bett er than non-busy outside directors.16 Our results also indicate a positive association between the percentage of outside directors and acquirer return s during acquisitions. A one percent increas e of outside directors, without considering the characteristics of individual outside directors, improves five-day CARs by about 0.05 percentage po ints. Similar to Masulis, Wang, and Xie (2007), we find negative and si gnificant coefficients for ac quirer pre-announcement stock price run-up. Consistent with Lang, Stulz, and Walkling (1991) and Servaes (1991), we find a positive association between Tobins q and acquirer returns. Relative deal size is negatively associated with ac quirer returns [Moeller, Sch lingemann, and Stulz (2004)]. Cash deal is positively associated with acquire r returns [see, for example, Travlos (1987)]. While coefficients for several control variab les are not significan t in our regressions, most of these variables obtain the signs sim ilar to other related studies. For example, negative coefficients are found for free cas h flow, diversifying acquisitions, and CEO duality. Positive coefficients are found for in side ownership, leverage, and intrastate indicator. B. Robustness Tests 16 It is possible that busy outside directors with a CEO title in S&P 500 firms or with directorships in other industries are invited to join the board before the announcement of acquisitions to enhance shareholder wealth. However, the average (median) tenure in the sample is 6.77 (5) years for busy outside directors with a CEO title in S&P 500 firms and is 8.19 (6) years for busy outside directors with directorships in other industries. These tenure characteristics suggest that strategically hiring busy outside directors shortly before a merger announcem ent is not prevalent.

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52 To check the robustness of our main resu lts, we apply several additional tests as reported in Table 9. First, acquirers may have multiple acquisitions within a short time and the calculation of acquirer re turns of individual acquisitions could be biased by other acquisitions within this period. Therefore, we exclude observations with multiple acquisitions within a year and redo the Table 8 regressions. The sample that excludes multiple acquisitions consists of 470 acquisi tions made by 331 acquirers. Similar results are obtained in Panel A of Table 9. We fi nd that firms with non-industry busy outside directors and firms with SP500-CEO busy outsi de directors reduce the negative acquirer returns caused by multiple directorships held by busy outside directors. In Panel B, we replace the percentage measures of particul ar types of busy outside directors by dummy variables. For example, the variable, with SP500-CEO busy outside director(s) is 1 if there is at least 1 SP500-CEO busy outside di rectors on the board and 0 if otherwise. Although the sizes of the coefficients in regression (3) and (4) are relative small compared with those reported in Table 8, our previous findings remain qualitatively unchanged. Table 9 Busy Outside Directors and Acquirer Returns Robustness Tests The sample consists of 854 acquisitions from 1998 to 2004. In Panel A, observations with multiple acquisitions within a year are excluded. The dependent variable in Panel A and B is the acquirers equalweighted five-day (-2, 2) cumulative abnormal return in percentage points calculated using the market model. Outside directors are defined as busy if they hold three or more directorships. Industry busy outside directors are busy outside directors with at least 50% of their directorships sharing the same 2-digit SIC code. Non-industry busy outside directors are busy outside directors with all outside directorships in other industries classified by 2-digit SIC code. SP500-CEO busy outside directors are busy outside directors with a CEO title in a S&P 500 firm. Non-SP500 busy outside directors are busy outside directors not current employees or directors of S&P 500 firms. Additional variables are all other variables as shown on Table 8. The t -statistics is reported in parenthesis. *, **, and *** stand for statistical significance based on two-sided tests at the 10%, 5%, and 1% level, respectively.

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53 Table 9 Continue Panel A: Exclude multiple acquisitions Variable (1) (2) (3) (4) (5) Percentage of busy outsid e directors -4.523***-4.392***-5.882*** -5.488*** -3.653** (-2.57) (-2.72) (-2. 79) (-2.83) (-2.16) Percentage of industry busy outside directors -0.993 (-0.17) Percentage of non-industry busy outside 5.180* directors (1.83) Percentage of SP500-CEO busy outside 5.665* directors (1.65) Percentage of non-SP500 busy outside -2.432 directors (-0.82) Additional variables Yes Yes Yes Yes Yes R 0.15 0.15 0.15 0.15 0.15 Panel B: Alternative measures of busy outside directors Variable (1) (2) (3) (4) (5) Percentage of busy outsid e directors -4.523***-4.472***-5.607*** -5.467*** -4.586*** (-2.57) (-2.59) (-2. 87) (-2.97) (-2.65) With industry busy outside director(s) -0.136 (-0.12) With non-industry busy outside director(s) 1.469* (1.68) With SP500-CEO busy outside director(s) 1.645** (1.97) With non-SP500 busy outside director(s) 0.069 (0.09) Additional variables Yes Yes Yes Yes Yes R 0.15 0.15 0.15 0.16 0.15 Panel C: CAR (-1, 1) equal-weighted Variable (1) (2) (3) (4) (5) Percentage of busy outside directors -3.100** -2.340* -4.977*** -4.523*** -1.181 (-2.21) (-1.78) (-2. 84) (-2.84) (-0.85) Percentage of industry busy outside directors -6.567 (-1.35) Percentage of nonindustry busy outside 6.298*** directors (2.72) Percentage of SP500-CEO busy outside 7.371** directors (2.50) Percentage of non-SP500 busy outside -5.620** directors (-2.33) Additional variables Yes Yes Yes Yes Yes R 0.16 0.17 0.17 0.17 0.17 Panel D: CAR (-2, 2) value-weighted Variable (1) (2) (3) (4) (5) Percentage of busy outsid e directors -3.845** -3.667** -5.274*** -5.258*** -2.882* (-2.39) (-2.51) (2.02) (-2.89) (-1.83) Percentage of industry busy outside directors -1.540 (-0.26) Percentage of non-industry busy outside 4.793* directors (1.82) Percentage of SP500-CEO busy outside 7.313** directors (2.16) Percentage of non-SP500 busy outside -2.820 directors (-1.05) Additional variables Yes Yes Yes Yes Yes R 0.16 0.17 0.17 0.17 0.17

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54 Table 9 Continue Panel E: CAR (-1, 1) value-weighted Variable (1) (2) (3) (4) (5) Percentage of busy outside directors -3.397** -2.619** -5.245*** -4.745*** -1.483 (-2.39) (-1.99) (-2.96) (-1.08) Percentage of industry busy outside directors -6.715 (-1.41) Percentage of nonindustry busy outside 6.201*** directors (2.68) Percentage of SP500-CEO busy outside 6.980** directors (2.30) Percentage of non-SP500 busy outside -5.604** directors (-2.36) Additional variables Yes Yes Yes Yes Yes R 0.18 0.18 0.18 0.18 0.18 In Panel C, five-day CARs are repl aced by three-day CARs (-1, 1). While coefficients for the percentage of non-indus try busy outside direct ors and the percentage of SP500-CEO busy outside directors remain significantly positive, the percentage of non-SP500 busy outside directors is found to be significantly ne gatively associated with acquirer returns, indicating that these bus y outside directors potentially reduce shareholder value. In addition, the insignifi cant coefficient for the percentage of busy outside directors in regressi on (5) suggests that the negative impact from busy outside directors on acquirer returns could be dominated by non-SP500 busy outside directors. In Panels (D) and (E), we employ the CRSP value-weighted return as the market return to estimate the market model parameters over the period and then calculate the three-day (-1, 1) and five-day (-2, 2) CARs. Panel (D) shows results that are consistent with those reported in Table 8, and results on Panel (E) are also similar to those on Panel (C). The coefficient for percentage of nonSP500 busy outside directors remains negative and significant when threeday CARs is applied.

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55 C. Diversifying Acquisitions In this section, we focus on diversifyi ng acquisitions in which acquirers and targets do not share the same 2-digit SIC code Diversifying acquisiti ons could be driven by managerial objectives and pot entially destroy shareholder value [Morck, Shleifer, and Vishny (1990)]).17 If outside directors pr otect shareholder wealth, outside directors with directorship(s) in the target industry coul d have better information about the target industry and therefore could be better at ev aluating the target. As a consequence, these directors could be more valuable than othe r outside directors for acquirer shareholders. However, our evidence in Table 10 indica tes that busy outsi de directors with directorship(s) in the target industry are not better than other busy outside directors. The coefficients for the percentage of busy outside directors with directorship(s) in target industry in regression (3) and (5) are positive bu t insignificant. This finding suggests that while outside directors improve acquirer re turns by about 9 per centage points, busy outside directors including busy outside dire ctors with directorship(s) in the target industry appear to reduce acquirer firm returns. Not reported in the table, non-busy outside directors (i .e. outside directors with only two di rectorships) with directorship in the target industry are not different from industry busy outside directors as well during diversifying acquisitions. In contrast, we still find busy outside directors with a CEO title in an S&P 500 firm perform better than other busy outside directors. While the impact from the 17 Recent studies such as Campa and Kedia (2002) an d Villalonga (2004) indicate diversification may not necessarily reduce firm value.

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56 Table 10 Diversifying Acquisitions The sample consists of 299 diversifying acquisitions from 1998 to 2004. Diversifying acquisitions are acquisitions in which acquirers and ta rgets do not share a 2-digit SIC code. In regression (1), (2), and (3), the dependent variable is the acquirers equal-weighted five-day (-2, 2) cumulative abnormal return in percentage points calculated using the market model. Value-weighted five-day (-2, 2) cumulative abnormal return in percentage points is applied in regression (4) and (5). Outside directors are defined as busy if they hold three or more directorships. SP500-CEO busy outside directors are busy outside directors with a CEO title in a S&P 500 firm. Board size measures the numbe r of directors. Acquirers pre-announcement stock price run-up is acquirers buy-and-hold abnormal return during the period (-210, -11) with the CRSP valueweighted market index as the benchmark. Free cash flow is calculated as operating income before depreciation minus interest expenses, income taxes, and capital expenditures scaled by book value of total assets. Leverage is the book value of long-term debts an d short-term debts over market value of total assets. Tobins q is calculated as market value of common equity plus preferred stock liquidating value, plus long term debt, minus short-term assets, plus short-term liabilities, and then scaled by total assets. Relative deal size is deal value over acquirers market capitalization. Market capita lization, measured in millions, is calculated as the number of shares outstanding multiplied by the stock price at the year end prior to announcement date. Intrastate is a dummy indicator and is 1 if acquirer and target are in the same state. The t -statistics is reported in parenthesis. *, **, and *** stand for statistical significance based on two-sided tests at the 10%, 5%, and 1% level, respectively. Variable (1) (2) (3) (4) (5) Percentage of busy outside directors -4.126* -6.206** -4.822** -6.791** -5.225** (-1.66) (-2.23) (-1. 98) (-2.57) (-2.19) Percentage of SP500-CEO busy outside 10.72** 11.81** directors (1.94) (2.24) Percentage of busy outside directors with 2.160 2.256 directorships(s) in target industry (0.65) (0.75) Percentage of outside director s 9.889** 8.897** 9.888** 8.236* 9.327** (2.38) (2.11) (2.37) (1.93) (2.22) Log (board size) 2.476 2.219 2.670 2.693 3.179 (1.08) (1.00) (1.19) (1.26) (1.46) Log (inside ownership) 0.794 0.820 0.790 1.111 1.078 (1.05) (1.09) (1.05) (1.49) (1.44) CEO chairman -1.116 -1.093 -1.180 -1.148 -1.241 (-0.94) (-0.92) (-1. 00) (-1.00) (-1.08) Acquirers pre-announcement stock price -1 .855** -1.904** -1.867** -2.101*** -2.060*** run-up (-2.35) (-2. 23) (-2.35) (-2.65) (-2.84) Free cash flow 8.580 8.383 7.001 1.816 0.384 (0.71) (0.70) (0.58) (0.15) (0.03) Leverage 1.076 1.388 1.093 0.533 0.206 (0.27) (0.34) (0.27) (0.13) (0.05) Log (total asset) 0.276 0.186 0.269 0.424 0.516 (0.63) (0.43) (0.61) (1.03) (1.24) Log (firm age) 0.480 0.525 0.519 0.178 0.169 (0.57) (0.63) (0.63) (0.22) (0.21) Tobins q 0.172 0.133 0.181 0.231 0.283 (0.52) (0.41) (0.55) (0.79) (0.96) Intrastate 2.452 2.423 2.489 2.020 2.090 (1.24) (1.23) (1.26) (1.04) (1.07) Relative deal size -7.281***-7 .466***-7.208*** -7.342*** -7.062*** (-3.31) (-3.49) (-3. 30) (-3.43) (-3.25) All-cash deal 1.259 0.935 1.377 1.156 1.636 (1.17) (0.87) (1.28) (1.13) (1.58) Year dummies Yes Yes Yes Yes Yes R 0.21 0.22 0.21 0.23 0.22

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57 percentage of SP500-CEO busy outside direct ors on acquirer returns offsets the impact from the percentage of busy outside direct ors, SP500-CEO busy outsi de directors still improve acquirer returns by about 9 percentage points, which is the coefficients of the percentage of outside directors. It should be noted that usin g directorships in the target industry to proxy for the expe rience of busy outside direct ors could be inappropriate because the director could obtain experience in the target industry from other sources, such as previously being an employee in target industry. Overall, the results reported in Table 10 are consistent with our earlier find ings that some busy outside directors are better than others.18 D. Multiple Directorships and CEO Title D.1 Do Multiple Directorships Add Value to Directors Who Are CEOs of Other Firms? In regression (4) of Table 8, we report a positive and significant coefficient for the percentage of SP500-CEO busy outside directors, indicating that these busy outside directors could offset the negative impact from multiple directorships held by busy outside directors on acquirer returns. However, these busy outside directors with a CEO title in an S&P 500 firm are not better th an non-busy outside di rectors. We might, therefore, question whether multiple directorsh ips reduce the value of holding a CEO title in an S&P 500 firm. To address this issue, we develop a variable, percentage of SP500CEO non-busy outside directors, to compar e with the percentage of SP500-CEO busy 18 Not reported in Table 11, we test the relationship between five-day cumulative abnormal returns (CARs) and the percentage of non-industry busy outside directors. The coefficient for the percentage of nonindustry busy outside directors is 6.306 with t-statistics of 1.37.

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58 outside directors. As shown on Table 11, whil e the coefficients for the percentage of SP500-CEO non-busy outside directors are insigni ficant in all regressions, we observe positive and significant coefficients for th e percentage of SP500-CEO busy outside directors. The positive impact from SP 500-CEO busy outside directors on acquirer returns recovers the negative impact from multiple directorships held by busy outside directors. Thus, our results indicate th at CEOs of S&P 500 firms who hold multiple directorships are not less va luable members of the board than CEOs of S&P 500 firms who are not busy. D.2 Are SP500-CEO Busy Outside Directors Better than Non-SP500-CEO Busy Outside Directors? Table 11 S&P 500-CEO Busy and Non-Busy Outside directors The sample consists of 854 acquisitions from 1998 to 2004. In regression (1), and (2) the dependent variable is the acquirers equal-weighted five-day (-2, 2) cumulative abnormal return in percentage points calculated using the market model. Value-weighted five-day (-2, 2) cumulative abnormal return in percentage points is applied in regression (3) and (4 ). Outside directors are defined as busy if they hold three or more directorships. SP500-CEO busy (non-busy) outside directors are busy (non-busy) outside directors with a CEO title in a S&P 500 firm. Board size measures the number of directors. Acquirers preannouncement stock price run-up is acquirers buy-and-hold abnormal return during the period (-210, -11) with the CRSP value-weighted market index as the be nchmark. Free cash flow is calculated as operating income before depreciation minus interest expenses, in come taxes, and capital expenditures scaled by book value of total assets. Leverage is the book value of long-term debts and short-term debts over market value of total assets. Tobins q is calculated as market value of common equity plus preferred stock liquidating value, plus long term debt, minus short-term assets, plus short-term liabilities, and then scaled by total assets. Relative deal size is deal va lue over acquirers market capita lization. Market capitalization, measured in millions, is calculated as the number of shares outstanding multiplied by the stock price at the year end prior to announcement date. Diversifying acquisitions are acquisitions in which acquirers and targets do not share a 2-digit SIC code. Intrastate is a dummy indicator and is 1 if acquirer and target are in the same state. The t -statistics is reported in parenthesis. *, **, and *** stand for statistical significance based on two-sided tests at the 10%, 5%, and 1% level, respectively.

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59 Table 11 Continue Variable (1) (2) (3) (4) Percentage of busy outside direct ors -3.693** -5.260*** -3.802** -5.241*** (-2.36) (-3.00) (-2.35) (-2.87) Percentage of SP500-CEO busy outside directors 8.142** 7.477** (2.43) (2.21) Percentage of SP500-CE O non-busy outside directors 3.053 3.756 5.060 5.705 (0.57) (0.71) (0.92) (1.04) Percentage of outside dir ectors 4.567* 4.136* 3.649 3.254 (1.83) (1.66) (1.40) (1.25) Log (board size) 0.541 0.447 0.432 0.346 (0.37) (0.31) (0.29) (0.24) Log (inside ownership) 0.529 0.567 0.561 0.597 (1.43) (1.55) (1.49) (1.59) CEO chairman -0.650 -0.644 -0.682 -0.676 (-0.87) (-0.86) (-0.90) (-0.89) Acquirers pre-announcement stock price ru n-up -3.394*** -3.428*** -4.020*** -4.052*** (-3.65) (-3.67) (-4.00) (-4.01) Free cash flow -5.492 -5.721 -5.341 -5.551 (-0.44) (-0.46) (-0.42) (-0.43) Leverage 3.228 3.658 2.563 2.958 (0.88) (0.99) (0.68) (0.78) Log (total asset) 0.283 0.233 0.393 0.347 (1.12) (0.93) (1.55) (1.38) Log (firm age) -0.195 -0.249 -0.421 -0.470 (-0.38) (-0.49) (-0.81) (-0.91) Tobins q 0.409** 0.392** 0.423** 0.407** (2.29) (2.19) (2.24) (2.15) Intrastate 0.970 0.961 1.007 0.998 (0.89) (0.88) (0.92) (0.91) Relative deal size -3.456 *** -3.418*** -3.793*** -3.758*** (-3.15) (-3.13) (-3.34) (-3.32) All-cash deal 1.838*** 1.751*** 1.797*** 1.717*** (2.71) (2.60) (2.71) (2.61) Diversifying acquisitions -0.792 -0.758 -0.640 -0.609 (-1.15) (-1.10) (-0.93) (-0.88) Year dummies Yes Yes Yes Yes R 0.14 0.15 0.17 0.17 Finally, if busy outside dire ctors with a CEO title in an S&P 500 firm are better than other busy outside direct ors, we might question whethe r a CEO title in an S&P 500 firm is different from a CEO title in a nonS&P 500 firm. To address this issue, we measure the percentage of non-SP500-CEO busy outside direct ors to compare with the percentage of SP500-CEO busy out side directors. As reported in Table 12, the relatively small and insignificant coefficients for th e percentage of non-SP500-CEO busy outside directors indicate that busy out side directors with a CEO title in a non-S&P 500 firm

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60 could be different from busy outside directors with a CEO title in an S&P 500 firm. Busy outside directors with a CEO title in an S&P 500 firm could recover the negative impact from multiple directorships held by busy outside directors on acquirer returns as we found in previous sections. However, sim ilar evidence is not found for busy outside directors with a CEO title in a non-S&P 500 firm It supports the notion that management skills in relatively large, well-known firms could add value to outside directors and therefore enhance shareholder wealth. 5. Summary and Conclusion With a sample of 854 acquisitions fro m 1998 to 2004, we examine the differences among individual busy outside directors and we find that the generally ambiguous Table 12 S&P 500and Non-S&P 500-CEO Busy Outside Directors The sample consists of 854 acquisitions from 1998 to 2004. In regression (1), and (2) the dependent variable is the acquirers equal-weighted five-day (-2, 2) cumulative abnormal return in percentage points calculated using the market model. Value-weighted five-day (-2, 2) cumulative abnormal return in percentage points is applied in regression (3) and (4 ). Outside directors are defined as busy if they hold three or more directorships. SP500-CEO (Non-SP500-CEO) busy outside directors are busy outside directors with a CEO title in a S&P 500 (non-S&P 500) firm. Board size measures the number of directors. Acquirers pre-announcement stock price run-up is acquirers buy-and-hold abnormal return during the period (-210, -11) with the CRSP value-weighted market index as the benchmark. Free cash flow is calculated as operating income before depreciation mi nus interest expenses, income taxes, and capital expenditures scaled by book value of total assets. Leverage is the book value of long-term debts and shortterm debts over market value of total assets. Tobins q is calculated as market value of common equity plus preferred stock liquidating value, plus long term debt, minus short-term assets, plus short-term liabilities, and then scaled by total assets. Relative deal size is deal value over acquirer s market capitalization. Market capitalization, measured in millions, is calcula ted as the number of shares outstanding multiplied by the stock price at the year end prior to announcemen t date. Diversifying acquisitions are acquisitions in which acquirers and targets do not share a 2-digit SIC code. Intrastate is a dummy indicator and is 1 if acquirer and target are in the same state. The t -statistics is reported in parenthesis. *, **, and *** stand for statistical significance based on two-sided tests at the 10%, 5%, and 1% level, respectively.

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61 Table 12 Continue Variable (1) (2) (3) (4) Percentage of busy outside direct ors -3.727** -5.398*** -3.907** -5.450*** (-2.29) (-2.90) (-2.32) (-2.81) Percentage of SP500-CEO busy outside directors 8.203** 7.567** (2.39) (2.17) Percentage of non-SP500-CEO busy outside directors 0.147 1.882 1.226 2.827 (0.03) (0.35) (0.23) (0.51) Percentage of outside dir ectors 4.690* 4.222* 3.817 3.386 (1.89) (1.70) (1.48) (1.31) Log (board size) 0.600 0.506 0.522 0.435 (0.41) (0.35) (0.36) (0.30) Log (inside ownership) 0.523 0.563 0.553 0.590 (1.41) (1.53) (1.45) (1.56) CEO chairman -0.663 -0.662 -0.704 -0.703 (-0.88) (-0.89) (-0.93) (-0.93) Acquirers pre-announcement stock price ru n-up -3.394*** -3.422*** -4.017*** -4.042*** (-3.63) (-3.64) (-3.97) (-3.98) Free cash flow -5.494 -5.743 -5.354 -5.584 (-0.44) (-0.46) (-0.42) (-0.43) Leverage 3.246 3.759 2.637 3.110 (0.88) (1.00) (0.69) (0.80) Log (total asset) 0.285 0.241 0.400 0.359 (1.13) (0.96) (1.57) (1.42) Log (firm age) -0.185 -0.235 -0.402 -0.448 (-0.36) (-0.46) (-0.77) (-0.87) Tobins q 0.414** 0.402** 0.434** 0.422** (2.29) (2.21) (2.26) (2.19) Intrastate 0.930 0.892 0.928 0.893 (0.85) (0.82) (0.84) (0.81) Relative deal size -3.416 *** -3.374*** -3.730*** -3.691*** (-3.08) (-3.05) (-3.23) (-3.20) All-cash deal 1.850*** 1.775*** 1.822*** 1.754*** (2.70) (2.61) (2.71) (2.63) Diversifying acquisitions -0.784 -0.734 -0.620 -0.573 (-1.14) (-1.07) (-0.90) (-0.83) Year dummies Yes Yes Yes Yes R 0.14 0.15 0.17 0.17 relationships between busy outside directors a nd firm value could be driven by different types of busy outside director s. Supporting this la tter argument, we find that busy outside directors are associated with lower acquire r returns during acquisitions. However, busy outside directors with a CEO title in an S&P 50 0 firm and busy outside directors with all outside directorships in ot her industries do not reduce shareholder value during acquisitions. While our results do not indicate that these busy outside directors are better

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62 than non-busy outside directors, we do provide empirical evidence suggesting that simply using the number of directorsh ips to evaluate outside direct ors could be inappropriate. Busy directors with multiple directorship s in different industries and directors with a CEO title in an S&P 500 firm can be valuable sour ces of knowledge and experience to firms. Therefore, despite thei r busyness, these directors may still be good candidates for corporate boards. Fich (2005) suggests that some outside directors could be better than the others. Our results indica te that busy outside di rectors with diverse outside directorships and manage ment skills in large, well-k nown firms are different from other busy directors and may be valuab le to acquiring firms.

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70 About the Author Chia-wei Chen is a Ph.D. candidate in the Department of Finance at the University of South Florida. His primary ar ea of research is in corporate governance focusing on the board of directors. He has presented his papers at national academic conferences including EFA, FMA, SFA, and SWFA. He holds a MBA from the University of Houston and Bachelors degr ee in International Trade from National Chengchi University.


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ABSTRACT: This dissertation includes two related chapters that investigate the value of multiple directorships. In the first chapter, I focus on potential tradeoffs between the costs and benefits of multiple directorships held by outside directors and attempt to determine how firm characteristics affect such tradeoffs. It is widely believed that outside directors of a firm play important functions of monitoring and advising. As a result, the basic hypothesis of the first essay is that multiple directorships by outside directors can have different implications for firms that have different levels of monitoring and advising needs. Consistent with this hypothesis, the evidence suggests that firm performance is positively associated with multiple directorships for firms with high growth opportunities and low agency conflicts. Such firms would benefit more from better advising while not suffering much from less monitoring. Likewise, firm performance is negatively associated with multiple directorships for firms with low growth opportunities and high agency conflicts. In the second essay, I examine how multiple directorships held by outside directors affect shareholder wealth during acquisitions. The evidence indicates that not all busy outside directors have the same effect and some types of busy outside directors may benefit the firms.
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