The causal effect of board size in the performance of small and medium-sized firms

TY - JOUR

T1 - The causal effect of board size in the performance of small and medium-sized firms

AU - Bennedsen, Morten

AU - Kongsted, Hans Christian

AU - Meisner Nielsen, Kasper

N1 - JEL classification codes: G30, G32, K22

PY - 2008

Y1 - 2008

N2 - 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; we 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 we provide a causal analysis of board size effects on firm performance: We use a novel instrument given by the number of children of the chief executive officer (CEO) of the firms. First, we 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, we 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.

AB - 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; we 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 we provide a causal analysis of board size effects on firm performance: We use a novel instrument given by the number of children of the chief executive officer (CEO) of the firms. First, we 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, we 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.

KW - Faculty of Social Sciences

KW - board of directors

KW - corporate governance

KW - privately held firms

U2 - 10.1016/j.jbankfin.2007.09.016

DO - 10.1016/j.jbankfin.2007.09.016

M3 - Journal article

SN - 0378-4266

VL - 32

SP - 1098

EP - 1109

JO - Journal of Banking & Finance

JF - Journal of Banking & Finance

IS - 6

ER -