COUNSEL 20 Lecture 17:
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Tutorial 4, authors: jeffrey l. coles, naveen d. daniel, lalitha naveen. Factors perceived to affect board"s ability to function: Whether the people are outside managers or not. Larger boards could be less effective than smaller boards because of coordination problems and director free-riding. Termack (1996) and eisenberg, sundgren and wells (1998) provide evidence that smaller boards are associated with higher firm value, as measured by tobin"s q. The authors argue that under certain conditions, complex firms are likely to have smaller boards than optimal and that r&d-intensive firms, are likely to benefit from greater representation of insiders in the board. Thus, such firms should have a higher fraction of insiders in the board. If transaction costs are significant firms could deviate from their optimal board structure: prior literature and new hypotheses. This because smaller groups are more cohesive, more productive, and can monitor the firm more effectively. Previous research argues that larger boards offer better advice to the ceo.