Using Geographic Density of Firms to Identify the Effect of Board Size on Firm Value and Corporate Policies

Abstract

Prior research shows that firms tend to recruit directors from the geographically-proximate area. Due to a limited supply of qualified individuals in a given area, firms located in close proximity have to share a limited pool of talented individuals. As a result, the larger the number of firms in the same area, the fewer directors each firm in the area is able to obtain on average. Consistent with this notion, our results show that firms located in a zip code with a larger number of other firms exhibit significantly smaller board size. We then exploit the variation in the numbers of firms across the zip codes and estimate the effects of board size on various corporate outcomes. Our results show that larger board size leads to lower firm value, lower accounting profitability, higher leverage, higher dividend payouts, and a stronger propensity to be an acquirer.