The Advising Role of Busy Directors in Complex Business Transactions: Evidence From the Formation of Strategic Alliances

• In Event: Managerial Accounting Issues

Abstract

The board of directors has a dual mandate in overseeing the management and advising it on important decisions. To shed light on whether busy directors are poor monitors or effective advisors, we examine the role of busy directors in forming strategic alliances. We hypothesize that busy directors in large social networks have access to valuable information and possess expertise to overcome the incomplete contract problem in strategic alliances. Supporting this prediction, we find that firms with busy directors are more likely to form strategic alliances. When we separate strategic alliances into joint ventures and contractual alliances, we find that busy directors are more effective in helping establish contractual alliances, which exhibit a greater degree of contract incompleteness than joint ventures. In our further analyses, we find that busy directors play a more significant role in firms with less experienced CEOs, multiple segments, and more intangible assets. Collectively, our paper adds to the literature that busy directors are valuable advisors to firms involved in complex business transactions.

Authors

• Robert Felix, University of Baltimore

• Sebahattin Demirkan, Morgan State University

• Nan Zhou, SUNY-Binghamton