COUNSEL 20 Lecture Notes - Lecture 9: Social Loafing
Document Summary
These are proxies for complexity and the ceo"s need for advice. As firm complexity increases along any of these 3 dimensions, so does the need for advice and for a bigger board. Hypothesis 1: complex firms will have larger boards & more outside directors than simple firms. Hypothesis 2: high r&d firms will have a higher fraction of insiders on the board. There are likely to be long-lived deviations from optimal board size when the transaction costs of altering board structure exceed the benefits. Panel a: transaction costs are significant deviations from optimal size are long-lived and deviations are random. Panel b: transaction costs are significant deviations from optimal size are long-lived and deviations are not random simple firms have larger boards than optimal and complex firms have smaller boards than optimal. Firms increase board independence by adding outside directors instead of by removing inside directors. Hypothesis 3: tobin"s q increases in board size for complex firms.
