Fetching better deals from creditors: Board busyness, agency relationships and the bank cost of debt

Abstract

In a cross-country setting, we document that busy boards of directors (i.e., outside directors with multiple directorships) enhance a bank's financing capacity by lowering its cost of debt, which is consistent with the signalling quality hypothesis. Our analysis further reveals that this negative association is more pronounced in conventional banks than their Islamic counterparts. Possibly owning to the distinctive governance structure and the complexity of the Islamic business model, which requires closer monitoring, Muslim debtholders might depreciate a busy board of directors as it is likely to associate with lower scrutinising effectiveness. Our results provide a positive counterpoint to the negative relationship that exists between busy directors and firm performance, and contributes to understanding the indispensable role busy boards play in debt financing.