Do Older Boards Affect Firm Performance? An Empirical Analysis Based on Japanese Firms
31 Pages Posted: 6 Jul 2011 Last revised: 13 Jul 2011
Date Written: July 6, 2011
We analyze the role of board age on firm performance using a large sample of Japanese firms. The results reveal the existence of a significant negative relationship. After controlling for endogeneity using firm size as instrument, the effect of board age is found to be more significant, consistent with the notion that older directors are more likely to retain (relinquish) their positions in strongly (poorly) performing firms. In addition, we show that the performance of younger and high-growth firms is more sensitive to board age, which points to a risk-based explanation. Indeed, it appears that older boards are more reluctant to take risks and particularly to undertake acquisitions. Overall, the results underline the disadvantage of (re)appointing older managers since the latter tend to be more conservative, perhaps because of their shorter decision horizons or greater vested interests.
Keywords: board of directors, top management, decision making, risk aversion, performance
JEL Classification: G31, G34
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