Article - Yermack (Topic 8) Flashcards
What does Yermack discuss?
that smaller boards (below about 8 persons) are associated with higher firm value and superior financial performance
boards’ capacities for monitoring increase with board size, however what are the disadvantages? (3)
slower decision-making,
less-candid discussions of managerial performance,
and biases against risk- taking.
how large was Yedmacks sample size?
452 large US corporations 1984-91
what did Yermack find?
inverse relationship between board size and firm value
when are the greatest costs incurred due to board size increase?
as boards grow in size from small to medium
what did Yermack find in companies with smaller boards? (3)
- More favourable operating efficiency and profitability
- Stronger sensitivity of CEO compensation to firm performance (desirable)
- Higher likelihood of dismissing CEO after poor performance
How did stocks react to news about board size increase or decrease?
- board decrease = positive stock returns
- board increase = negative stock returns
When board size increases what impacts does it have on directors? (2)
• Directors fees increase as board size increases
• Director & officer equity ownership falls as board
size increases (agency cost vs director entrenchment)
Tobin’ s Q = MV of assets / Replacement cost of assets, shows value added, what causes Q to increase/decrease?
Q decreases wth increase in board size and increase in outside directors
Q increases with increase in director equity ownership
what affect does appointing a new CEO have on board size?
decreases board size
How is ROA affect by board size?
larger board size decreases ROA
when is a CEO more likely to get dismissed after a poor performance?
- CEO stock ownership is lower
- smaller boards are more likely to dismiss CEOs for poor performance
how does the Δ equity value and board size affect CEO salary and bonus?
positively correlated with Δ equity value (good)
negatively related with board size
What are Yedmacks conclusions? what are 3 key points of the findings?
Finds an inverse relation between board size and firm value, with largest fraction of lost value occurring as boards grow from small to medium size
- Poorer financial ratios (e.g., ROA)
- Weaker CEO performance incentives
- Negative abnormal stock returns
what point does Yermack disagree with?
board size → firm performance, not: firm performance→ board size
