KYKLOS, Vol. 57 – 2004 – Fasc. 3, 327–356 327 G4_HS:Aufträge:HEL002:15491_SB_Kyklos_2004-03:15491-A02:Kyklos_2004-03_S-303-472 28.5.04 22. Juli 2004 13:07 Is Board Size an Independent Corporate Governance Mechanism? Stefan Beiner, Wolfgang Drobetz, Frank Schmid and Heinz Zimmermann* I. INTRODUCTION The board of directors plays a pivotal role in the governance of widely held cor- porations. It is generally acknowledged that the legal and contractual setting as well as the structure and activities of the board of directors have a non-negligible impact on the agency costs to which firms are exposed. At least in theory, the board of directors is one of the most important corporate governance mecha- nisms ensuring that managers pursue the interests of shareholders. Its task is to monitor, discipline, and remove ineffective management teams. One may sus- pect that several aspects and mechanisms are important in increasing the effec- tiveness of boards, such as board composition, board independence, and board size. While there is ample empirical evidence on board composition and board independence, there is only little international empirical evidence on the rela- tionship between board size and firm valuation. Most importantly, previous pa- pers do not take into account that there are possibly complex interrelationships between different corporate governance mechanisms, i.e., they neglect that board size is only one mechanism out of a wide menu of choices a firm faces. Yermack (1996) was the first to report a negative relationship between board size and firm valuation. In general, an important issue in all empirical * Saïd Business School, University of Oxford, Park End Street, Oxford OX1 1HP, England, and Department of Finance, University of Basel, Holbeinstrasse 12, 4051 Basel, Switzerland, email: stefan.beiner@sbs.ox.ac.uk; Department of Corporate Finance, University of Basel, Peters- graben 51, 4003 Basel, Switzerland, email: wolfgang.drobetz@unibas.ch; Department of Economics, University of Bern, Vereinsweg 23, 3012 Bern, Switzerland, email: frank.schmid@ vwi.unibe.ch; Department of Finance, University of Basel, Holbeinstrasse 12, 4051 Basel, Swit- zerland, email: heinzz@bluewin.ch. We thank two anonymous referees, Yakov Amihud, Wolf- gang Bessler, Stefan Duffner, Reiner Eichenberger, David Rey, and Markus Schmid for valuable comments. Financial support from the National Center of Competence in Research ‘Financial Valuation and Risk Management’ (NCCR FINRISK) is gratefully acknowledged. The NCCR FINRISK is a research program supported by the Swiss National Science Foundation. Beiner ac- knowledges financial support from the Swiss National Science Foundation (SNF).