College of Economics & Academy of Financial Research Zhejiang University;School of Business
Manhattan College
Abstract:
The corporate governance reform in China offers an interesting context for investigating the
systematic relationship between board size and firm’s risky policy choices. Our results indicate
that firms with smaller boards are associated with higher executive pay-to-performance
sensitivity. These firms also tend to pursue riskier investment policies, engage more frequently in
earnings management, and experience larger variability in future firm performance. In addition,
Chinese firms with smaller-sized boards are found to be more conservative in using debt
financing. Overall, our Chinese evidence is consistent with the hypothesis that board size has
negative impacts on firm risk-taking.
