Using Demographic Identification to Estimate the Effect of Board Size on Corporate Performance

TLDR: In this paper, the effect of board size on corporate outcomes was investigated by exploiting the variations in the director-age populations across the states in the U.S. and found that firms with access to a larger pool of potential directors tend to have larger boards.

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 U.S. 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.