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Board size and firm value: evidence from Australia

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Abstract

We study the effect of board size on firm value in Australia. Using a large sample of Australian firms over the period 2001–2011, we find strong evidence of a negative relationship. We show that firms with a large board are associated with CEO compensation that is sensitive to firm size, but not to firm performance. This incentive to accumulate assets is congruent with the fact that firms with a large board also exhibit lower operating performance and higher operating costs. Furthermore, we find that the effect of board size is stronger in small firms. This result might explain why earlier studies, which focused on large Australian firms, found board size to have little impact on firm value.

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Notes

  1. Private equity firms seem to recognize this problem. In firms taken private, board size is dramatically reduced. Wruck (2008) indicates that the typical board of a private equity-controlled company has typically five to eight members, including a non-executive chairman, and only one executive director.

  2. The samples analysed by Kang et al. (2007) and Bonn et al. (2004) cover the 100 largest Australian companies; the sample of Kiel and Nicholson (2003) contains 460 firms and is closer to ours. However, it consists of only one cross section. The 500 largest firms in our sample are characterized by an average board size of 7.82 (median of 8 and standard deviation of 2.46).

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Authors and Affiliations

  1. NEOMA Business School, 1 Rue du Marechal Juin, 76 825, Mont-Saint-Aignan, France

    Pascal Nguyen

  2. Business Faculty, University of Technology Sydney, Ultimo, NSW, 2007, Australia

    Nahid Rahman, Alex Tong & Ruoyun Zhao

  3. Finance Discipline Group, University of Technology Sydney, P. O. Box 123, Broadway, NSW, 2007, Australia

    Ruoyun Zhao

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  1. Pascal Nguyen
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  2. Nahid Rahman
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  4. Ruoyun Zhao
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Correspondence to Ruoyun Zhao.

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Nguyen, P., Rahman, N., Tong, A. et al. Board size and firm value: evidence from Australia. J Manag Gov 20, 851–873 (2016). https://doi.org/10.1007/s10997-015-9324-2

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