Do Older Boards Affect Firm Performance? An Empirical Analysis Based on Japanese Firms by Makoto Nakano, Pascal Nguyen :: SSRN

Do Older Boards Affect Firm Performance? An Empirical Analysis Based on Japanese Firms by Makoto Nakano, Pascal Nguyen :: SSRN:

Are older board members good or bad? The answer seems to be "Yes".


Whether it is good OR bad ...it depends on what you want the board to do. If you want conservatism, then older board members appear to be better. However, if you want to risk taking leadership, you probably want a younger board.

From the abstract:

"After controlling for endogeneity using firm size as instrument, the effect of board age is found to be more significant....we show that the performance of younger and high-growth firms is more sensitive to board age, which points to a risk-based explanation. Indeed, it appears that older boards are more reluctant to take risks and particularly to undertake acquisitions. Overall, the results underline the disadvantage of (re)appointing older managers since the latter tend to be more conservative, perhaps because of their shorter decision horizons or greater vested interests."

and from the paper:

"... we further show that the impact of board age does not depend on the firm’s size or affiliation to a business group, but is stronger among younger and high-growth firms, and among firms using more intangible assets. These results point out that some firms may require different types of managers because of their different characteristics. More precisely, it appears that the greater determination and ability to take risk typical of younger managers make them more fit to operate in high-growth or rapidly-changing environments (Child, 1974; Wiersema and Bantel, 1992). 

.....Our cross-sectional regressions show that firms with older boards exhibit a significantly lower variability in their operating profits, market values and stock returns. They are also less likely to undertake acquisitions, which are considered to be risky investments. This result is consistent with May (1995) who notes that managers with more capital vested are more likely to diversify in order to reduce their firm’s idiosyncratic risk. In the case of Japan, age can be a good proxy for a manager’s vested capital due to the enduring practice of lifetime employment and deferred compensation (Ono, 2010). This negative influence on risk-taking may explain why older boards are associated with lower profitability and firm value." 

 I guess not unsurprising, but interesting none-the-less.


Cite:
  Nakano, Makoto and Nguyen, Pascal, Do Older Boards Affect Firm Performance? An Empirical Analysis Based on Japanese Firms (July 5, 2011). Available at SSRN: http://ssrn.com/abstract=1879250