Why Do Firms with Larger Boards Have Lower Market Values? Evidence from the Investment Behavior of Japanese Firms

36 Pages Posted: 18 Mar 2014

See all articles by Makoto Nakano

Makoto Nakano

Hitotsubashi University

Pascal Nguyen

Neoma Business School; University of Technology Sydney (UTS); Financial Research Network (FIRN)

Date Written: December 1, 2013


We show that large boards are detrimental to the performance of Japanese firms. Unlike in the US, this effect is concealed by the fact that Japanese firms that have performed well are more likely to increase the size of their boards. Using an instrumental variable approach to address this endogeneity problem, we find that larger boards result in both lower market values and operating profits. One explanation for the negative effect on firm performance is that larger boards exhibit a greater propensity to overinvest and expand the firm’s balance sheet beyond its optimal scale. The evidence also shows that larger boards are less willing to undertake divestitures despite the potential value they might be able to extract from the sale of underutilized assets. Overall, board size appears to affect the firm’s ability to manage its assets in the most effective way. The adoption of US-style officers does not mitigate the negative board size-firm performance relationship.

Keywords: board size, performance, governance, investment decisions, asset growth, divestitures

JEL Classification: G31, G32, G34

Suggested Citation

Nakano, Makoto and Nguyen, Pascal, Why Do Firms with Larger Boards Have Lower Market Values? Evidence from the Investment Behavior of Japanese Firms (December 1, 2013). Available at SSRN: https://ssrn.com/abstract=2409882 or http://dx.doi.org/10.2139/ssrn.2409882

Makoto Nakano

Hitotsubashi University ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8601

HOME PAGE: http://sites.google.com/site/makotonakano2/

Pascal Nguyen (Contact Author)

Neoma Business School ( email )

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Mont Saint Aignan Cedex, 76825
+33 2 3282 5774 (Phone)

University of Technology Sydney (UTS) ( email )

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+61 2 9514 7711 (Fax)

HOME PAGE: http://datasearch.uts.edu.au/business/finance/staff/StaffDetails.cfm?UnitStaffId=4415

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane

HOME PAGE: http://www.firn.org.au

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