Using demographic identification to estimate the effects of board size on corporate performance |
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Authors: | Pandej Chintrakarn Shenghui Tong Richard M Proctor |
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Institution: | 1. Mahidol University International College (MUIC), Nakhon Pathom, Thailand;2. China Huarong Asset Management, Co., Ltd, Beijing, China;3. Siena College, Albany, NY, USA |
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Abstract: | Motivated by agency theory, we investigate the effect of board size on corporate outcomes. To address endogeneity, we exploit the variations in the director-age populations across the states in the US. We argue that firms with access to a larger pool of potential directors tend to have larger boards. Consistent with this notion, our empirical results show that firms located where the size of the director-age population is larger have significantly larger board size. Because the director-age population represents broad demographic trends outside of any firm’s control, it is unlikely related to firm outcomes or policies and should be exogenous. Using the director-age population as our instrument, we estimate the effects of board size on firm value and profitability. Our approach is less vulnerable to endogeneity and is more likely to show a causal effect. |
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Keywords: | Board size firm value corporate governance instrumental variable endogeneity |
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