Board Size, Firm Type, and Stock Return Volatility

Abstract

We analyze the association of board size and stock return volatility for different firm types. First, we find significant evidence that the association is non-linear over all firms. Second, we find that this differs for different firm types. While complex firms show a negative linear relationship between board size and volatility, research and development intensive firms exhibit a stronger u-shaped relationship. This shape is incompatible with the explanation in previous studies that larger boards experience communication and coordination problems which lead to lower volatility. Third, we provide evidence for an alternative explanation, namely that having more directors improves monitoring, but only up to a point. Our results hold for a battery of robustness checks, including a variety of endogeneity tests.

Keywords: board size, volatility, complex firms, R\&D-heavy firms, monitoring

JEL Classification: G31; G34; M52