Hostname: page-component-586b7cd67f-t7fkt Total loading time: 0 Render date: 2024-11-23T18:48:45.481Z Has data issue: false hasContentIssue false
  • English
  • Français

Determinants of Board Size and Composition: A Theory of Corporate Boards

Published online by Cambridge University Press:  06 April 2009

Charu G. Raheja
Charu G. Raheja
Affiliation:
[email protected], Owen Graduate School of Management, Vanderbilt University, 401 21st Ave. South, Suite 304, Nashville, TN 37203.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper models the interaction of firm insiders and outsiders on a corporate board and addresses the question of the board's ideal size and composition. In the model, the board is responsible for monitoring projects and making CEO succession decisions. Inside directors are better informed regarding the quality of firm investment projects, but outsiders can use CEO succession to motivate insiders to reveal their superior information and help the board implement higher value projects. The optimal board structure is determined by the trade-off between maximizing the incentive for insiders to reveal their private information, minimizing coordination costs among outsiders and maximizing the ability of outsiders to reject inferior projects. I show that optimal board size and composition are functions of the directors' and the firm's characteristics. I also develop testable implications for crosssectional variations in the optimal board structure across firms.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 40 , Issue 2 , June 2005 , pp. 283 - 306
Copyright
Copyright © School of Business Administration, University of Washington 2005

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Adams, R., and Ferreira, D.. “A Theory of Friendly Boards.” Unpubl. Working Paper, Stockholm School of Economics (2003).CrossRefGoogle Scholar
Adams, R., and Mehran, H.. “Is Corporate Governance Different for Bank Holding Companies? Economic Policy Review, 9 (2003), 123–142.Google Scholar
Almazan, A., and Suarez, J.. “Entrenchment and Severance Pay in Optimal Governance Structures.” Journal of Finance, 58 (2003), 483–518.CrossRefGoogle Scholar
Berle, A. D., and Means, G. C.. The Modern Corporation and Private Property. New York, NY: Macmillan (1932).Google Scholar
Boone, A.; Field, L.; Karpoff, J.; and Raheja, C.. “The Evolution and Life Cycle of Corporate Boards: An Empirical Analysis.” Unpubl. Working Paper, Penn State Univ. (2004).Google Scholar
Brickley, J.; Link, J.; and Coles, J.. “What Happens to CEOs after They Retire? New Evidence on Career Concerns, Horizon Problems, and CEO Incentives.” Journal of Financial Economics, 52 (1999), 341–377.CrossRefGoogle Scholar
Chemmanur, T., and Fulgheri, P.. “A Theory of the Going-Public Decision.” Review of Financial Studies, 12 (1999), 249–279.CrossRefGoogle Scholar
Coles, J., and Hoi, C.-K.. “New Evidence of the Market for Directors: Board Membership and Pennsylvania Senate Bill 1310.” Journal of Finance, 58 (2003), 197–230.CrossRefGoogle Scholar
Demsetz, H., and Lehn, K.. “The Structure of Corporate Ownership: Causes and Consequences.” Journal of Political Economy, 93 (1985), 1155–1177.CrossRefGoogle Scholar
Denis, D., and Sarin, A.. “Ownership and Board Structure in Publicly Traded Corporations.” Journal of Financial Economics, 52 (1999), 187–223.CrossRefGoogle Scholar
Eisenberg, T.; Sundgren, S.; and Wells, M.. “Larger Board Size and Decreasing Firm Value in Small Firms.” Journal of Financial Economics, 48 (1998), 35–54.CrossRefGoogle Scholar
Fama, E., and Jensen, M.. “Separation of Ownership And Control.” Journal of Law and Economics, 26 (1983), 301–325.CrossRefGoogle Scholar
Ferris, S.; Jagannathan, M.; and Pritchard, A. C.. “Too Busy to Mind the Business? Monitoring by Directors with Multiple Board Appointments.” Journal of Finance, 58 (2003), 1087–1112.CrossRefGoogle Scholar
Gillan, S.; Hartzell, J.; and Starks, L.. “Industries, Investment Opportunities, and Corporate Governance Structures.” Unpubl. Working Paper, Univ. of Texas (2003).Google Scholar
Gillete, A. B.; Noe, T. H.; and Rebello, M. J.. “Corporate Board Composition, Protocols, and Voting Behavior: Experimental Evidence.” Journal of Finance, 58 (2003), 1997–2031.CrossRefGoogle Scholar
Gilson, S. “Bankruptcy, Boards, Banks, and Blockholders.” Journal of Financial Economics, 27 (1990), 355–387.Google Scholar
Groups that Work. Hackman, R., ed. San Francisco, CA: Jossey-Bass (1990).Google Scholar
Gutierrez, M. “Managers and Directors: A Model of Strategic Information Transmission.” Unpubl. Working Paper, Universidad Carlos III de Madrid (2001).Google Scholar
Harford, J. “Takeover Bids and Target Director's Incentives: Retention, Experience and Settling-Up.” Journal of Financial Economics, 69 (2003), 51–83.Google Scholar
Hermalin, B., and Weisbach, M.. “The Determinants of Board Composition.” The RAND Journal of Economics, 19 (1988), 589–606.CrossRefGoogle Scholar
Hermalin, B., and Weisbach, M.. “Endogenously Chosen Boards of Directors and their Monitoring of the CEO.” American Economic Review, 88 (1998), 96–118.Google Scholar
Hermalin, B., and Weisbach, M.. “Board of Directors as an Endogenously-Determined Institution: A Survey of the Economic Literature.” Economic Policy Review, 9 (2003), 7–26.Google Scholar
Hirshleifer, D., and Thakor, A. “Managerial Performance, Boards of Directors and Takeover Bidding.” Journal of Corporate Finance, 1 (1994), 63–90.CrossRefGoogle Scholar
Jensen, M. “The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems.” Journal of Finance, 48 (1993), 831–880.CrossRefGoogle Scholar
John, K., and Senbet, L. W. “Corporate Governance and Board Effectiveness.” Journal of Banking and Finance, 22 (1998), 371–401.CrossRefGoogle Scholar
Kaplan, S., and Reishus, D. “Outside Directorships and Corporate Performance.” Journal of Financial Economics, 27 (1990), 389–410.CrossRefGoogle Scholar
Lasfer, M. A. “Board Structure and Agency Costs.” Unpubl. Working Paper, City Univ. Business School (2002).CrossRefGoogle Scholar
Lehn, K; and Patro, S.; and Zhao, M. “Determinants of the Size and Structure of Corporate Boards: 1935–2000.” Unpubl. Working Paper, Univ. of Pittsburgh (2003).Google Scholar
Lipton, K., and Lorsch, J. W. “A Modest Proposal for Improvement of Corporate Governance.” Business Lawyer, 48 (1992), 59–77.Google Scholar
Mace, M. L.Directors: Myth and Reality. Boston, MA: Harvard Business School Press (1986).Google Scholar
Maug, E. “Board of Directors and Capital Structure: Alternative Forms of Corporate Restructuring.” Journal of Corporate Finance, 3 (1997), 113–139.Google Scholar
Parrino, R. “CEO Turnover and Outside Succession: A Cross-Sectional Analysis.” Journal of Financial Economics, 46 (1997), 165–197.Google Scholar
Reingold, J. “Dot.com Boards Are Flouting the Rules: They're Small and Packed with Insiders. Does it Matter?” Business Week (12 1999).Google Scholar
Warther, V. “Board Effectiveness and Board Dissent: A Model of the Board's Relationship to Management and Shareholders.” Journal of Corporate Finance, 4 (1998), 53–70.CrossRefGoogle Scholar
Yermack, D. “Higher Valuation of Companies with a Small Board of Directors.” Journal of Financial Economics, 40 (1996), 185–212.CrossRefGoogle Scholar