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

Posted: 18 Dec 2006

See all articles by Theodore Eisenberg

Theodore Eisenberg

Cornell University, Law School (Deceased)

Stefan Sundgren

Swedish School of Economics and Business Administration

Martin T. Wells

Cornell University - Law School

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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

Suggested Citation

Eisenberg, Theodore and Sundgren, Stefan and Wells, Martin T., Larger Board Size, Decreasing Firm Value, and Increasing Firm Solvency. Journal of Financial Economics, pp. 35-54, 1998, Available at SSRN: https://ssrn.com/abstract=952160

Theodore Eisenberg (Contact Author)

Cornell University, Law School (Deceased) ( email )

Myron Taylor Hall
Cornell University
Ithaca, NY 14853-4901
United States

Stefan Sundgren

Swedish School of Economics and Business Administration ( email )

P.O. Box 287
FI-65100 Vasa
Finland

Martin T. Wells

Cornell University - Law School ( email )

Comstock Hall
Ithaca, NY 14853
United States
607-255-8801 (Phone)

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