Does Board Size Matter?

Abstract

This paper uses legal board size requirements to test whether board size affects firm performance and value. Since 1976, the minimum size of German firms’ supervisory boards increases from 12 to 16 directors at 10,000 domestic employees, resulting in a sharp increase in board sizes. Regression discontinuity analyses show that ROA and Tobin’s Q decline by 2-3 percentage points and 0.20, respectively, at the threshold. A difference-in-differences analysis around the law’s introduction shows similar effects. Large boards’ underperformance is persistent, not just a transitory effect of adding directors, and large boards are associated with lower profit margins and M&A announcement returns.

Keywords: Boards of Directors, Board Regulation, Board Size, Corporate Governance

JEL Classification: G30, G34, G38