The Impact of Board Size on Firm Performance: Evidence from the UK

Guest, P.M. 2009. The Impact of Board Size on Firm Performance: Evidence from the UK, European Journal of Finance, Vol. 15 (4), pp. 385-404

39 Pages Posted: 27 Jul 2012

See all articles by Paul M. Guest

Paul M. Guest

Kings Business School; University of Cambridge - Centre for Business Research (CBR)

Date Written: 2009

Abstract

We examine the impact of board size on firm performance for a large sample of 2,746 UK listed firms over 1981-2002. The UK provides an interesting institutional setting, because UK boards play a weak monitoring role and therefore any negative effect of large board size is likely to reflect the malfunction of the board’s advisory rather than monitoring role. We find that board size has a strong negative impact on profitability, Tobin’s Q and share returns. This result is robust across econometric models that control for different types of endogeneity. We find no evidence that firm characteristics that determine board size in the UK lead to a more positive board size – firm performance relation. In contrast, we find that the negative relation is strongest for large firms, which tend to have larger boards. Overall, our evidence supports the argument that problems of poor communication and decision-making undermine the effectiveness of large boards.

Keywords: corporate governance, board size, firm performance, endogeneity, UK

JEL Classification: G30

Suggested Citation

Guest, Paul M., The Impact of Board Size on Firm Performance: Evidence from the UK (2009). Guest, P.M. 2009. The Impact of Board Size on Firm Performance: Evidence from the UK, European Journal of Finance, Vol. 15 (4), pp. 385-404, Available at SSRN: https://ssrn.com/abstract=2118221

Paul M. Guest (Contact Author)

Kings Business School ( email )

Kings College London
Strand
London, London WC2R 2LS
United Kingdom

University of Cambridge - Centre for Business Research (CBR) ( email )

Top Floor, Judge Business School Building
Trumpington Street
Cambridge, CB2 1AG
United Kingdom

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