Content area
Full Text
We find that the most common board size for US publicly-traded firms ranges from eight to eleven directors. Over time, small boards (seven or fewer directors), tend to increase their size, but large boards (12 or more directors), tend to shrink their size. This result suggests a significant mean reversion trend in board size over time. We conclude that firms may be motivated by more than just value maximization and resource dependency when selecting board size in practice. It may be the trade-off of the costs and benefits of various board sizes that motivate board size selection.
* Hermalin and Weisbach (2003) argue that economic Darwinism would eliminate a large corporate board, if a board with a large number of directors is harmful to firm value. Similarly, if large boards were better, economic Darwinism would eliminate small boards. This argument suggests that firms with non-optimally sized boards must adapt to changes or face extinction. We test to see if the adaption occurs in an aggregate way by employing a random sample of 473 US publicly-traded firms from the Center for Research and Security Prices (CRSP) database over a 12year period, from 1988 to 1999.
We find that the average board size of US publicly-traded firms has a median of nine members, and it was relatively stable in the 1990s. Most boards have between eight and eleven directors. Boards with seven or fewer directors tend to increase their size, while large boards with tweleve or more directors tend to reduce their size to the target zone. This finding suggests a significant mean reversion trend in board size over time. Further examination of firm value and board size using three subgroups of firms (those with seven or fewer directors; those with eight to eleven directors; and those with twelve or more directors) reveals that the mean reversion trend in corporate board size may be driven by more than just value maximization and resource dependency when selecting board size in practice. The trade-off between the benefits of a large board and the costs of a large board is able to explain this phenomenon better than either theory on its own.
What we propose is that corporate decision-makers seem to consider both agency costs and resource dependency...