Boards: Does One Size Fit All?

Posted: 8 Sep 2006

See all articles by Naveen D. Daniel

Naveen D. Daniel

Drexel University - Department of Finance

Jeffrey L. Coles

University of Utah - Department of Finance

Lalitha Naveen

Temple University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Abstract

This paper re-examines the relation between firm value and board structure. We find that complex firms, which have greater advising requirements than simple firms, have larger boards with more outside directors. The relation between Tobin's Q and board size is U-shaped which, at face value, suggests that either very small or very large boards are optimal. This relation, however, arises from differences between complex and simple firms. Tobin's Q increases (decreases) in board size for complex (simple) firms and this relation is driven by the number of outside directors. We find some evidence that R&D-intensive firms, for which the firm-specific knowledge of insiders is relatively important, have a higher fraction of insiders on the board and that, for these firms, Q increases with the fraction of insiders on the board. Our findings challenge the notion that restrictions on board size and management representation on the board necessarily enhance firm value.

Keywords: Corporate governance, directors, board composition, board size, Tobin's Q

JEL Classification: G32, G34, K22

Suggested Citation

Daniel, Naveen D. and Coles, Jeffrey L. and Naveen, Lalitha, Boards: Does One Size Fit All?. Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=928839

Naveen D. Daniel

Drexel University - Department of Finance ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
215-895-5858 (Phone)
215-895-2955 (Fax)

HOME PAGE: http://lebow.drexel.edu/Faculty/DanielN

Jeffrey L. Coles (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-587-9093 (Phone)

Lalitha Naveen

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-6435 (Phone)

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