Larger Board Size, Decreasing Firm Value, and Increasing Firm Solvency

Abstract

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