Busy directors, bank performance, risk-taking and accounting conservatism

Submission note: A thesis submitted in total fulfilment of the requirements for the degree of Doctor of Philosophy to the Department of Accounting and Data Analytics, La Trobe Business School, College of Arts, Social Sciences and Commerce, La Trobe University.

This thesis examines busy directors’ association with bank performance, risk-taking and accounting conservatism. It is motivated by the conflicting findings in the existing literature on the role of bank directors with multiple directorships (busy directors). In addition, there is a lacking research on the role of busy directors in the context of the market where external governance environment is weak. Using data from banks operating in South Asia, where the level of directors’ busyness is higher than that in most developed countries, this thesis finds evidence for an optimal level of busyness at which directors have a significant association with bank performance, risk-taking, and accounting conservatism. It is argued that a quadratic model parsimoniously captures the tension between the ‘reputation hypothesis’ which derives from resource dependence theory (RDT) and ‘over-boarding hypothesis’ which derives from agency theory (AT). First, from the busy directors and performance/risk-taking models it is found that a robust inverted u-shaped relationship exists between directors’ busyness and bank performance and a u-shaped relationship is evident between directors’ busyness and bank risk-taking. In further analysis, it also finds that the quadratic relationship between busyness and performance/risk-taking holds well for inside directors only, and the AT effect cancels out the RDT effect for independent directors (IDs). This confirms that, while busy inside directors make a significant contribution to the board advising function, the busy IDs’ contribution to board monitoring function is not significant. An optimal level of inside directors’ busyness exists where the reputation hypothesis dominates the over-boarding hypothesis at less than the optimal level of busyness and vice versa. This makes it possible to reconcile mixed evidence in the literature on the relationship between busyness and performance/risk-taking. Second, this thesis examines the association between busy directors and accounting conservatism and finds that banks with busy directors do exercise earnings conservatism in financial reporting, while banks with busy directors’ delay recognising loan losses according to changes in loan losses. Furthermore, using the quadratic model, this thesis finds that at the low level of busyness of directors, banks exhibit higher earnings conservatism, while at the high level of busyness of directors, they exhibit lower earnings conservatism. In contrast, regarding timely loan loss recognition at the low level of busyness of directors, banks delay loan loss recognition, whereas at the high level of such busyness they are timely in loan loss recognition. This is a unique finding in bank earnings management literature which confirms that public equity banks follow both earnings conservatism and income increasing earnings management in their financial reporting. The thesis also finds evidence that, compared to outside busy directors as board monitors, inside busy directors as board advisors have a significant association with accounting conservatism. Evidence is also found that, banks with family ownership are profitable, take less risk and adopt conservatism in their financial reporting whereas such evidence is significantly negative for banks with government ownership and not significant for banks with institutional ownership. This thesis eventually confirms that busy directors provide a new channel through which controlling owners control bank boards’ decision-making processes and influence bank performance, risk-taking, and accounting conservatism.