Board size and firm risk-taking

Board size and firm risk-taking The main purpose of this paper is to investigate the relevance of board size and firm’s risky policy choices. I find that both the managerial pay to performance sensitivity (delta) and the managerial pay to firm risk sensitivity (vega) are negatively related to board size, suggesting that small boards give CEOs larger incentives and force them to bear more risk than larger boards. While controlling for the effects of managerial compensation schemes on corporate investment policy and financing policy, I find that companies with smaller boards take lower leverage but more risky investment. Finally, after controlling for the effects of financial decisions on overall firm risk, I find that companies with smaller boards are associated with higher future risk. This supports the hypothesis that board size has negative impact on firm’s risk taking. My results are robust to various estimation methods that control for endogeneity and panel dynamics. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Board size and firm risk-taking

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Publisher
Springer US
Copyright
Copyright © 2011 by Springer Science+Business Media, LLC
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-011-0241-4
Publisher site
See Article on Publisher Site

Abstract

The main purpose of this paper is to investigate the relevance of board size and firm’s risky policy choices. I find that both the managerial pay to performance sensitivity (delta) and the managerial pay to firm risk sensitivity (vega) are negatively related to board size, suggesting that small boards give CEOs larger incentives and force them to bear more risk than larger boards. While controlling for the effects of managerial compensation schemes on corporate investment policy and financing policy, I find that companies with smaller boards take lower leverage but more risky investment. Finally, after controlling for the effects of financial decisions on overall firm risk, I find that companies with smaller boards are associated with higher future risk. This supports the hypothesis that board size has negative impact on firm’s risk taking. My results are robust to various estimation methods that control for endogeneity and panel dynamics.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Apr 27, 2011

References

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