Larger Board Size, Decreasing Firm Value, and Increasing Firm Solvency
Cornell University, Law School (Deceased)
Swedish School of Economics and Business Administration
This study finds significant correlations between board size and profitability and between board size and solvency in a sample of small and mid-size firms. Several studies hypothesize a relationship between board size and firm financial performance. Empirical tests of the relationship exist in a few studies of large U.S. firms. We find a negative correlation between board size and profitability in small and mid-size Finnish firms. Finding a board-size effect for a new and different class of firms points towards the influence of group size on risk-taking behavior as a source of the board-size effect. A new board-size effect we report, a positive correlation between board size and firm solvency, further supports the hypothesis that board-size effects result from distortions of risk-taking behavior.
JEL Classification: G32
Date posted: August 21, 1996