Working Paper: NBER ID: w17387
Authors: John R. Graham; Sonali Hazarika; Krishnamoorthy Narasimhan
Abstract: We study a period of severe disequilibrium to investigate whether board characteristics are related to corporate investment, debt usage, and firm value. During the 1930-1938 Depression era, when the corporate sector was shocked by an unprecedented downturn, we document a relation between board characteristics and firm performance that varies in economically sensible ways: Complex firms (that would benefit more from board advice) exhibit a positive relation between board size and firm value, and simple firms exhibit a negative relation between board size and firm value. Moreover, simple firms with large boards do not downsize adequately in response to the severe economic contraction: they invest more (or shrink less) and use more debt during the 1930s. We document similar effects for the number of outside directors on the board. Finally, we also find that companies with properly aligned governance structures are more likely to replace the company president following poor performance.
Keywords: Corporate Governance; Debt Usage; Investment Policy; Firm Value; Great Depression
JEL Codes: G31; G32; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| board size (L25) | corporate investment (G31) |
| board size (L25) | debt usage (G32) |
| board size (L25) | firm value (complex firms) (G32) |
| board size (L25) | firm value (simple firms) (G32) |
| number of outside directors (G34) | corporate investment (G31) |
| number of outside directors (G34) | debt usage (G32) |
| number of outside directors (G34) | firm value (complex firms) (G32) |
| number of outside directors (G34) | firm value (simple firms) (G32) |