Size and advisory role of corporate boards

Abstract

Board size has received significant attention among researchers and regulators. However, the advisory role of boards has not been studied much. In this study I examine the notion that investors value larger boards for their advisory capabilities. Prior studies examine board size in the context of monitoring role of corporate boards and find opposite effects on debt holders and equity holders. Using market-based measures of total firm performance, which take both equity and debt into account; I find that larger boards are associated with greater economic value added (EVA). Using a sample of S&P 1500 firms from 2000 to 2003 and controlling for various firm and industry characteristics, I also find that the board size is positively associated with firm productivity and various other efficiency measures such as return on assets (ROA), return on equity (ROE) and Sales-Turnover ratio. I argue that firms with larger boards, valuing the advisory role of directors offer greater compensation to the directors. Overall the results indicate that large board size has a positive impact on firm's performance. The results are robust to alternative measures of firm performance and other key variables.

Citation

Upadhyay, A. (2008), "Size and advisory role of corporate boards", Choi, J.J. and Dow, S. (Ed.) Institutional Approach to Global Corporate Governance: Business Systems and Beyond (International Finance Review, Vol. 9), Emerald Group Publishing Limited, Leeds, pp. 163-185. https://doi.org/10.1016/S1569-3767(08)09008-0