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Review of Quantitative Finance and Accounting

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01.08.2008 | Original Paper

Board size and firm performance: the moderating effects of the market for corporate control

verfasst von: Shijun Cheng, John H. Evans III, Nandu J. Nagarajan

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 2/2008

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Abstract

We examine whether takeover threats affect the importance of board size using the passage of state antitakeover laws enacted in mid-to-late 1980s as our empirical setting. While the Complement Hypothesis predicts that board size matters more before the passage of the laws, the Substitute Hypothesis predicts the opposite. For a sample of 350 Forbes 500 firms over the period 1984–1991, we find a significant association between smaller boards and better firm performance before passage of antitakeover laws, but a much weaker relation (reduced by more than one-third) after the takeover restrictions were in place. Consistent with the Complement Hypothesis, this finding suggests that decreasing board size is more valuable when the market for corporate control is more active.

Nächster Artikel An empirical assessment of the premium associated with meeting or beating both time-series earnings expectations and analysts’ forecasts

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Comment and Schwert (1995) find that ATLs are associated with a significant increase in takeover premiums. Karpoff and Malatesta (1989) find that ATLs significantly reduce stock values of firms covered by the ATLs.

Magnet (1992, p. 86): The corporate governance system doesn't need rebuilding from the ground up; the existing machinery just needs to be switched on. Even so, getting boards to stop snoozing, and even if need be to turn activist, isn't easy. After all, why should they? A culture of quietism reigns in many boardrooms. Says Calpers General Counsel Richard Koppes, "One of the problems is, it's not polite to ask questions".

Hermalin and Weisbach (2003) describe how investors’ perspectives on board size represent another important indication of its significant role in the governance process.

The impact of takeover threats on the importance of board composition is unclear, however, as reflected in the mixed evidence of prior studies (e.g., Brickley and James 1987; Mayers et al. 1997).

The results are robust to this exclusion.

The results are the same if we define Ind_THREAT as equal to one if all of the industry specific ratios exceed the corresponding median ratio.

The inclusion of the interaction term AfterLAW × % of outside directors _t-1, which is insignificant, does not change the results.

The results remain unchanged when we use capital expenditures divided by total assets to measure growth opportunities.

The results are similar if we control for industry fixed effects rather than firm fixed effects.

The reported p-values are based on standard errors corrected for heteroskedasticity and auto-correlations.

The results reported in Table 2 are robust to adding indicator variables for the presence of stock option plans for directors and non-director blockholders of at least 5% of shares outstanding. Likewise, the results remain qualitatively unchanged when the models are estimated using median regressions, which are less sensitive to outliers.

We also include the interactions of Ind_THERAT and BID_TKN, with Ln(Number of directors) and find these interactions to be insignificant as well. A possible reason for this insignificance is that BID_TKN, and AfterPIL are likely endogenous. While Ind_THREAT is exogenous to the firm, Panel B of Table 1 shows that this variable remained stable over the sample period. Thus, the insignificance of these interaction terms further justifies our approach of using passage of the ATLs as an exogenous shock to takeover threats. Furthermore, the inclusion of interactions between the indicator that a state passed an ATL over the sample period and Ln(Number of directors), or between year indicators and Ln(Number of directors) does not change the main results.

Generalized linear models clustering on incorporation states generate similar results. Furthermore, adding an indicator variable for firms incorporated in Delaware to the model in Column (2) of Table 2 yields very similar results.

We find similar results when unexpected performance is measured as the change in the accounting rate of return on assets (ΔROA). In addition, the changes specifications control for firm-fixed effects.

We find no evidence that antitakeover laws affect the importance of board size on the relation between CEO turnover and firm performance. One possible explanation for the different finding for CEO compensation versus CEO turnover is that the two serve as substitute CEO incentive mechanisms.

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Titel: Board size and firm performance: the moderating effects of the market for corporate control
verfasst von: Shijun Cheng
John H. Evans III
Nandu J. Nagarajan
Publikationsdatum: 01.08.2008
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 2/2008
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-007-0074-3

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