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Board Size Effects in Closely Held Corporations

Author

Listed:
  • Bennedsen, Morten

    (Department of Economics, Copenhagen Business School)

  • Kongsted, Hans Christian

    (Department of Economics, Copenhagen Business School)

  • Nielsen, Kasper Meisner

    (Department of Economics, Copenhagen Business School)

Abstract

Previous work on board size effects in closely held corporations has established a negative correlation between board size and firm performance. We argue that this work has been incomplete in analysing the causal relationship due to lack of ownership information and weak identification strategies in simultanous equation analysis. In the present paper we reexamine the causal relationship between board size and firm performance using a dataset of more than 5,000 small and medium sized closely held corporations with complete ownership information and detailed accounting data. We test the potential endogeneity of board size by using a new instrument given by the number of children of the founders of the firms. Our analysis shows that board size can be taken as exogenous in the performance equation. Furthermore, based on a flexible model specification we find that there is no empirical evidence of adverse board size effects in the typical range of three to six board members. Finally, we find a significantly negative board size effect in the minority of closely held firms which have comparatively large boards of seven or more members.

Suggested Citation

  • Bennedsen, Morten & Kongsted, Hans Christian & Nielsen, Kasper Meisner, 2006. "Board Size Effects in Closely Held Corporations," Working Papers 09-2004, Copenhagen Business School, Department of Economics.
  • Handle: RePEc:hhs:cbsnow:2004_009
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    File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7566
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    References listed on IDEAS

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    1. Michael C. Jensen, 2010. "The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 43-58.
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    3. Raghuram Rajan & Henri Servaes & Luigi Zingales, 2000. "The Cost of Diversity: The Diversification Discount and Inefficient Investment," Journal of Finance, American Finance Association, vol. 55(1), pages 35-80, February.
    4. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 2000. "Agency Problems and Dividend Policies around the World," Journal of Finance, American Finance Association, vol. 55(1), pages 1-33, February.
    5. Yermack, David, 1996. "Higher market valuation of companies with a small board of directors," Journal of Financial Economics, Elsevier, vol. 40(2), pages 185-211, February.
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    7. repec:hrv:faseco:30747163 is not listed on IDEAS
    8. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-325, June.
    9. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
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    11. Benjamin E. Hermalin & Michael S. Weisbach, 2003. "Boards of directors as an endogenously determined institution: a survey of the economic literature," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 7-26.
    12. Bennedsen, Morten & Wolfenzon, Daniel, 2000. "The balance of power in closely held corporations," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 113-139.
    13. Eisenberg, Theodore & Sundgren, Stefan & Wells, Martin T., 1998. "Larger board size and decreasing firm value in small firms," Journal of Financial Economics, Elsevier, vol. 48(1), pages 35-54, April.
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    More about this item

    Keywords

    board size effects; boards;

    JEL classification:

    • H00 - Public Economics - - General - - - General

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