Board size and firm value: evidence from Australia

Abstract

We study the effect of board size on firm value in Australia. Using a large sample of Australian firms over the period 2001-2011, we find strong evidence of a negative relationship. We show that firms with a large board are associated with CEO compensation that is sensitive to firm size, but not to firm performance. This incentive to accumulate assets is congruent with the fact that firms with a large board also exhibit lower operating performance and higher operating costs. Furthermore, we find that the effect of board size is stronger in small firms. This result might explain why earlier studies, which focused on large Australian firms, found board size to have little impact on firm value.

Sustainable Causal Interpretation with Board Characteristics: Caveat Emptor

“…In this study, we investigate and find the causal relationships of board and firm characteristics, which have not been addressed in corporate governance. We further reconcile conflicting evidence from prior literature, especially on effectiveness of board size [1][2][3] and independent directors [3,5,11,13] in firm performance.…”

“…In addition to board independence, researchers have studied the association between board size and firm value. Board size, the total number of directors sitting in an organization's board at a particular time, is often said to be one of the most imperative elements in board structure [1][2][3]. As board size increases, directors are less likely to participate in board-level discussions, because the cost of not participating falls sharply and more effort is required to reach a conclusion.…”

“…In corporate governance literature, a wide range of research has been conducted in examining relations of board characteristics and firm performance, corporate events, or another firm governance structures. Authors investigate an impact of a specific board characteristic on an overall measure of firm performances, such as Tobin's Q [1][2][3], those surrounding corporate events, such as CEO turnover [4][5][6], or another corporate governance structure, an executive compensation [7][8][9]. The most commonly used board characteristics are board size [1][2][3] and board independence [3][4][5][10][11][12][13].…”

“…Authors investigate an impact of a specific board characteristic on an overall measure of firm performances, such as Tobin's Q [1][2][3], those surrounding corporate events, such as CEO turnover [4][5][6], or another corporate governance structure, an executive compensation [7][8][9]. The most commonly used board characteristics are board size [1][2][3] and board independence [3][4][5][10][11][12][13]. Since late the 2000s, additional board characteristics have been introduced: Directors with different areas of expertise and experiences [10,[14][15][16], foreign directorships [17,18], female director positions [19][20][21], and nominations of certain numbers of outside directors over 69 years [9].…”

“…We choose Tobin's Q as a measure of firm performance among other candidates, return on assets (ROA) or return on equity (ROE), because Tobin's Q is a measure commonly used in the literature [1][2][3]. Secondly, we control for ROA in regression analysis on Tobin's Q.…”