This study aims to examine the impact of board busyness on corporate cash holdings using the 2014 busy board mandate, which limits the multiple directorships a director can hold.
We utilize a comprehensive panel dataset of all firms listed on the National Stock Exchange (NSE) from 2006 to 2023. To assess the causal impact of board busyness on corporate cash holdings, this study employs a Difference-in-Difference (DiD) analysis. Additionally, we incorporate propensity score matching techniques, conduct falsification tests and use alternative measures of cash holdings and firm fixed effects for robustness tests.
Using a quasi-natural experiment, we find that restricting multiple directorships results in a significant reduction in corporate cash holdings, as it mitigates the oversight gap and enhances the board's capacity for active monitoring. This improved oversight restricts managerial discretion and limits the accumulation of excess financial slack. This result is more evident for firms with low institutional ownership, non-family firms, less financially constrained firms, and fewer investment opportunities. Additionally, firms are more likely to allocate excess cash toward dividend payouts rather than investing in capital projects or R&D activities, signalling a shift from passive to active oversight.
The findings suggest that the busy board mandate improves governance by reducing the information processing delay resulting from director overcommitment. This supports SEBI's reforms, which focus on strengthening governance quality and addressing agency issues in Indian companies. However, the mandate's uneven effects indicate that although it mitigates managerial opportunism, additional mechanisms may be required to address specific agency conflicts in family-controlled firms.
This study is the first to use the implementation of the busy board mandate introduced by the Securities and Exchange Board of India (SEBI) in 2014 as an exogenous shock to investigate the relationship between busy board and corporate cash holdings. This research offers a novel explanation of how regulatory limits catalyze a shift from passive to active monitoring by reducing director overcommitment.
