Higher market valuation of companies with a small board of directors

Higher market valuation of companies with a small board of directors I present evidence consistent with theories that small boards of directors are more effective. Using Tobin's Q as an approximation of market valuation, I find an inverse association between board size and firm value in a sample of 452 large U.S. industrial corporations between 1984 and 1991. The result is robust to numerous controls for company size, industry membership, inside stock ownership, growth opportunities, and alternative corporate governance structures. Companies with small boards also exhibit more favorable values for financial ratios, and provide stronger CEO performance incentives from compensation and the threat of dismissal. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economics Elsevier

Higher market valuation of companies with a small board of directors

Journal of Financial Economics, Volume 40 (2) – Feb 1, 1996

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Publisher
Elsevier
Copyright
Copyright © 1996 Elsevier Ltd
ISSN
0304-405x
DOI
10.1016/0304-405X(95)00844-5
Publisher site
See Article on Publisher Site

Abstract

I present evidence consistent with theories that small boards of directors are more effective. Using Tobin's Q as an approximation of market valuation, I find an inverse association between board size and firm value in a sample of 452 large U.S. industrial corporations between 1984 and 1991. The result is robust to numerous controls for company size, industry membership, inside stock ownership, growth opportunities, and alternative corporate governance structures. Companies with small boards also exhibit more favorable values for financial ratios, and provide stronger CEO performance incentives from compensation and the threat of dismissal.

Journal

Journal of Financial EconomicsElsevier

Published: Feb 1, 1996

References

  • Managers, owners, and the pricing of risky debt: An empirical analysis
    Bagnani, Elizabeth Strock; Milonas, Nikolaos T.; Saunders, Anthony; Travlos, Nickolaos G.
  • Diversification's effect on firm value
    Berger, Philip G.; Ofek, Eli
  • Corporate takeovers, firm performance, and board composition
    Kini, Omesh; Kracaw, William; Mian, Shehzad

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