Contemporary Trends and Challenges in Finance by Unknown

Author:Unknown
Language: eng
Format: epub
ISBN: 9783030430788
Publisher: Springer International Publishing

2 Literature Review

Literature has pointed out the following characteristics of the board to have a significant effect on the performance of the company.

2.1 Board Size

Board size is measured by the number of directors in the company’s board. The efficient of the board is measured on its ability to making clear and objective goals, useful strategies and effective decisions that largely transform the company. The overall outcome of this is regulated by the performance of the company. It is argued that small board size is always associated with better performance. This is associated with time used to pass a decision on the board, where it is far shorter in a small-sized board compared to in a large-sized board. This can be seen in the findings of Yermack, (1996), Dalton et al. (1998), Haniffa and Hudaib (2006), Abidin et al. (2014), Guest (2009), Ujunwa et al. (2012), Zainal et al. (2013), Rose et al. (2013) and Berk and DeMarzo (2014), Appiadjei et al. (2017) were large board size negatively affected the company’s performance. Similar findings were observed by Alabebde (2016) in the UK and Johl et al. (2015) in Malaysia.

Evidence has also shown that large board is also associated with better performances. By increasing the number of individuals with different backgrounds and experience in its board, the company allows the creation of new ideas and methods that help to transform the company. This was supported by Ahmadi et al. (2018) who observed a positive relationship between the French CAC 40 companies board size to the factor of ROE. In their study, Ahmadi et al. (2018) found no such relationship with ROA. Similarly, Rashid (2018) in Bangladesh observe a positive correlation between the board size and firm performance and that of Vishwakarma and Kumar (2015) for India top IT firms Abdallah et al. (2018), in Jordan, Kyereboah-Coleman and Biekpe (2006) in Ghana, Johl et al. (2013), and Shukeri et al. (2012), Abdullah and Ismail (2013) in Malaysia, Jackling and Johl (2009) in India, Gaur et al. (2015) and in New Zealand, Haque (2017) in the UK.

Chen and Al-Najjar (2012) also observed that the size of the board to be influenced by the existence of supervisory board and managerial ownership. While the studies of Yammeesri and Herath (2010), Müller (2014), Sarpong-Danquah et al. (2018) observe no relationship between the performance and the board size. Darmadi (2011) found rather than size, the proportion of the young board members positively and significantly influence the performance of Indonesia firms. Hidayat and Utama (2016) observed a U shaped, non-linear relationship between the board size and the performance of Indonesia firms. In this study a positive relationship between the board size and the company performance was examined. The hypothesis tested in the study is stated below.

Hypothesis 1

A small board size is associated with a positive performance of the company.

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