Using demographic identification to estimate the effects of board size on corporate performance

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.

KEYWORDS:

• Board size
• firm value
• corporate governance
• instrumental variable
• endogeneity

JEL CLASSIFICATION:

• G30
• G32
• G34

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ In addition, we also run a regression analysis including state-specific control variables such as state population, population density and the number of firms in the state. This alternative analysis yields similar results.