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Board Size Effects in Closely Held Corporations

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Previous work on board size effects in closely held corporationshas established a negative correlation between board size and firm performance.We argue that this work has been incomplete in analysing the causalrelationship due to lack of ownership information and weak identificationstrategies in simultanous equation analysis. In the present paper we reexaminethe causal relationship between board size and firm performance using adataset of more than 5,000 small and medium sized closely held corporationswith complete ownership information and detailed accounting data. We testthe potential endogeneity of board size by using a new instrument given bythe number of children of the founders of the firms. Our analysis shows thatboard size can be taken as exogenous in the performance equation. Furthermore,based on a flexible model specification we find that there is noempirical evidence of adverse board size effects in the typical range of threeto six board members. Finally, we find a significantly negative board sizeeffect in the minority of closely held firms which have comparatively largeboards of seven or more members.

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Morten Bennedsen, Hans Christian Kongsted, Kasper Meisner Nielsen

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