Professor of Economics
Corporate Governance; Board Process and Remuneration at the Top; Corporate Governance for Private Firms ;
Journal Article | Journal of Banking and Finance | 32 | January 2008
The Causal Effect of Board Size in the Performance of Small and Medium Sized Firms
Empirical studies of large publicly traded firms have shown a robust negative relationship between board size and firm performance. The evidence on small and medium-sized firms is less clear; the authors show that existing work has been incomplete in analyzing the causal relationship due to weak identification strategies.Using a rich data set of almost 7000 closely held corporations the authors provide a causal analysis of board size effects on firm performance: the authors use a novel instrument given by the number of children of the chief executive officer (CEO) of the firms.First, the authors find a strong positive correlation between family size and board size and show this correlation to be driven by firms where the CEO's relatives serve on the board. Second, the authors find empirical evidence of a small adverse board size effect driven by the minority of small and medium-sized firms that are characterized by having comparatively large boards of six or more members.