Do Firms Adjust Corporate Governance in Response to Economic Policy Uncertainty? Evidence From Board Size
22 Pages Posted: 23 Jun 2020
Date Written: May 30, 2020
Abstract
Prior research shows that board size has a significant effect on firm performance. Therefore, board size is a crucial aspect of the board of directors. We investigate how firms adjust board size in response to economic policy uncertainty (EPU). We find that firms reduce board size in the presence of EPU. In particular, a rise in EPU by one standard deviation reduces board size by 21.61% on average. Our results are consistent with the notion that agency conflicts are more severe in the presence of EPU. Accordingly, firms strengthen their corporate governance by reducing board size.
Keywords: board size, economic policy uncertainty, corporate governance, board of directors
JEL Classification: E66, M21, G34
Suggested Citation: Suggested Citation