Board Size and Firm Value: Evidence from South Africa

Abstract

We investigate the association between board size and firm value for a sample of 169 firms from 2002 to 2007 in post Apartheid South Africa (SA). The post Apartheid SA corporate context is interestingly and uniquely characterised by greater urgency to meet affirmative action provisions in board appointments, limited qualified and experienced directors, especially black directors, concentrated ownership, weak enforcement of corporate regulations and greater government ownership. These make SA corporate boards to play weaker agency (advisory, monitoring and disciplining) role than Western European and US boards, but stronger resource (resources, such as business contacts and contracts) dependence role. This suggests that any positive impact of board size on firm value is likely to depend on the effective execution of the resource dependence role than the agency role. Our main conclusion is that board size has a positive association with firm value, as proxied by Tobin’s Q. The findings are robust across a raft of econometric models that control for different types of endogeneity, including simultaneity and firm-level fixed effects, as well as different types of accounting and market-based firm valuation measures. Our findings suggest that the boards of the sampled firms perform the resource dependence role better than the agency role.

Keywords: Corporate Governance, Board Size, Firm Value, Black Empowerment and Affirmative Action, King II and South Africaa Endogeneity

JEL Classification: G12, G34, G38