Do Boards Really "Cause" Better Performance?
Governance and performance shape each other over time. Take that seriously, and many familiar board effects on firm value disappear.
A large literature asks whether board structure, how big a board is or how independent, affects firm performance. The trouble is that boards are not handed to firms at random. Today's board reflects yesterday's performance, and both reflect things about the firm that researchers never observe.
The paper brings a dynamic panel GMM estimator to this problem. The approach uses a firm's own history to construct valid instruments, addressing both unobserved differences across firms and the two-way street between governance and performance.
Re-examining roughly 6,000 firms from 1991 to 2003, the study finds no causal relation between board structure and current firm performance. It also shows why standard approaches that ignore these dynamics can produce biased results, and it lays out when the dynamic estimator is appropriate and what caveats apply.
The paper has become one of the most cited methodological references in governance research, ranking in the top 1% by citations in economics and business and appearing in the Journal of Financial Economics list of its most cited papers.
The Takeaway
Once the dynamic, self-reinforcing relationship between governance and performance is accounted for, board structure shows no causal effect on current performance.