Do Firms Adjust to a Target Board Structure?

Abstract:     
We present evidence that firms pursue target board structures, and that they do so at economically meaningful rates. Using a broad panel of changes to board structure over the period 1991 to 2003, we find that changes are frequent, with approximately two-thirds of firms changing either board size or independence during a two-year period. We predict a target board structure for each firm-year based on existing theory, and find that firms close about 45% of the gap between their actual and predicted target board size, and 63% of the gap between their actual and predicted target board independence over a two-year period. The rate of change is positively associated with the benefits of implementing effective boards and negatively associated with measures of CEO influence. Observed changes in both board independence and size in either direction are consistent with the pursuit of an economically efficient target, suggesting that pressures to adopt boards with prescribed characteristics may reduce efficiency.

Keywords: board independence, board size, board structure, board reform, corporate governance, regulation, endogeneity, dynamic adjustment

JEL Classifications: D23, G34, G38, K22, M14

Working Paper Series