Board size and firm performance: the moderating effects of the market for corporate control |
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| Authors: | Shijun Cheng John H Evans III Nandu J Nagarajan |
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| Institution: | (1) Robert H. Smith School of Business, University of Maryland, College Park, MD 20742-1815, USA;(2) Joseph M. Katz Graduate School of Business, University of Pittsburgh, Pittsburgh, PA 15260, USA |
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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.
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| Keywords: | Antitakeover laws Board of directors Firm performance |
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