higher market valuation of strongcompaniesstrong with a small board of.pdf

EISEVIER Journal of Financial Economics 40 (1996) 185-211 Higher market valuation of companies with a small board of directors David Yermack Stern School of’ Business, New York Universiiy, New York, NY 10012. USA (Received November 1994;final version received July 1995) Abstract I present evidence consistent with theoriesthat small boardsof directorsare more effective, Using Tobin’s Q as an approximation of market valuation, I find an inverse association between board size and firm value in a sample of 452 large U.S. industrial corporations between 1984 and 1991. The result is robust to numerous controls for company size, industry membership, inside stock ownership, growth opportunities, and alternative corporate governance structures. Companies with small boards also exhibit more favorable values for financial ratios, and provide stronger CEO performance incentivesfrom compensationand the threat of dismissal. Key words: Boards of directors; Corporate governance JEL classification: G30; G32; K22 1. Introduction A growing body of empirical researchexaminesthe structure and effectiveness of corporate governance systems.An important insight from this literature is that top managers’ decisions appear to be influenced by executive compensa- tion, takeover threats, monitoring by boards of directors, and other control I have benefited from helpful comments by Rita Maldonado-Bear, Wayne Mikkelson (the editor), Eli Ofek, participants in the NYU finance seminar, and an anonymous referee.I thank Eli Ofek for the use of company diversification data