Board of Directors' Size and Performance in the Banking Industry

This paper investigates the relationship between board size and performance in a sample of 174 bank and savings-and-loan holding companies, over the period 1995-2002. Using panel data techniques, we find that contrary to theories predicting that smaller boards of directors are more effective, increasing the number of directors in banking firms does not undermine performance. In contrast, the evidence is in favor of a positive relationship between board size and performance, as measured by Tobin's Q and the return on assets. We investigate whether this positive association is due to the fact that banks reduce the number of their directors in the aftermath of poor performance by testing for the endogeneity of board size to performance. The findings show that the number of directors leaving the board and the number of those joining the board for the first time increase following a poor performance, but the net change in board size is not affected by past performance. We conclude that the board size-performance relationship goes from board size to performance and that the calls to reduce the number of directors in banks might have adverse effects on performance