Does Board Size Matter?

65 Pages Posted: 3 Mar 2023 Last revised: 17 Oct 2023

See all articles by Dirk Jenter

Dirk Jenter

London School of Economics & Political Science (LSE) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Thomas Schmid

The University of Hong Kong - Faculty of Business and Economics

Daniel Urban

Erasmus University Rotterdam (EUR) - Department of Business Economics; Erasmus Research Institute of Management (ERIM)

Date Written: October 4, 2023

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

Suggested Citation

Jenter, Dirk and Schmid, Thomas and Urban, Daniel, Does Board Size Matter? (October 4, 2023). European Corporate Governance Institute – Finance Working Paper No. 916/2023, Available at SSRN: https://ssrn.com/abstract=4371743 or http://dx.doi.org/10.2139/ssrn.4371743

Dirk Jenter (Contact Author)

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

HOME PAGE: http://personal.lse.ac.uk/jenter/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Thomas Schmid

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Daniel Urban

Erasmus University Rotterdam (EUR) - Department of Business Economics ( email )

Netherlands

HOME PAGE: http://sites.google.com/view/danielurban/home

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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