Using Demographic Identification to Estimate the Effect of Board Size on Corporate Performance
12 Pages Posted: 25 Aug 2016
Date Written: August 22, 2016
Motivated by agency theory, we investigate the effect of board size on corporate outcomes. To address endogeneity, we exploit the variations in the director-age populations across the states in the U.S. We argue that firms with access to a larger pool of potential directors tend to have larger boards. Consistent with this notion, our empirical results show that firms located where the size of the director-age population is larger have significantly larger board size. Because the director-age population represents broad demographic trends outside of any firm’s control, it is unlikely related to firm outcomes or policies and should be exogenous. Using the director-age population as our instrument, we estimate the effects of board size on firm value and profitability. Our approach is less vulnerable to endogeneity and is more likely to show a causal effect.
Keywords: board size, firm value, corporate governance, instrumental variable, endogeneity
JEL Classification: G30, G32, G34
Suggested Citation: Suggested Citation