Nonlinear Effect of Board Size on Corporate Performance: Impact of the Cultural Backgrounds of Directors in Hong Kong

• DOI: http://doi.org/10.1111/ajfs.12205
• Date: 01 February 2018
• Published date: 01 February 2018
• Author: Jim C. K. Yeung

Nonlinear Effect of Board Size on Corporate

Performance: Impact of the Cultural

Backgrounds of Directors in Hong Kong*

Jim C. K. Yeung**

College of Business, City University of Hong Kong, Hong Kong and School of Accounting, Zhongnan

University of Economics and Law, China

Received 12 October 2015; Accepted 8 September 2017

Abstract

Our results reveal a curvilinear relationship between board size and firm performance after

controlling the cultural backgrounds of directors. We demonstrate that the board size effect

on performance is contingent on the cultural backgrounds of directors for firms listed in

major Hong Kong exchanges. The proportion of Anglo-American directors on a board nega-

tively moderates this effect when the board is small and positively moderates the effect when

the board is large. Our findings call for appropriate board sizes for listed firms and suggest

that cultural diversity can positively moderate the board size effect for large boards.

Keywords Corporate governance; Board composition; Cultural backgrounds of directors;

Corporate financial performance

JEL Classification: G32, G34

1. Introduction

In US firms, board size is negatively associated with firm performance. According

to agency theory, a smaller board is preferred for effective monitoring (Yermack,

1996). However, the findings of studies conducted on US firms cannot necessarily

be generalized to other national and cultural settings (e.g., Kiel and Nicholson,

2003; Bonn et al., 2004). The effect of board size has been suggested as partially

*The author thanks Professor Kwangwoo Park,the editor, and two anonymous reviewers fortheir

valuable comments, which have significantly improved the paper. Special thanks are made to the

author’s dissertation supervisor, Professor Matthew Lee, Vice President of City University of

Hong Kong and Dr. Isabel Yan,Assistant Dean of the Economic and Finance Department at City

University of Hong Kong for their helpful suggestions and guidance. The author remains solely

responsible for any remaining errors.

**Corresponding author: Focal Industrial Centre, Flat 32, 8th Floor, Block B, 21 Man Lok

Street, Hunghom, Kowloon, Hong Kong. Tel: +852-2303-9699, Fax: +852-2363-9179, email:

jimyeung@ngailik.com.

Asia-Pacific Journal of Financial Studies (2018) 47, 107–131 doi:10.1111/ajfs.12205

©2018 Korean Securities Association 107

contingent on the institutional context in question; however, little is known about

the influence of a director’s cultural background on the board size effect. Examining

cultural backgrounds is particularly useful when analyzing the effects of board size

on firm performance in a Chinese-dominant context. Most theories of corporate

governance have been developed in Anglo-American contexts and thus are based on

Anglo-American assumptions regarding the roles of individuals and firms. Chinese

culture is distinct from Anglo-American culture, and this may affect the application

of such theories and subsequent theoretical predictions in Asian contexts (Van

Essen et al., 2012).

In East Asia, Hong Kong is a suitable region for examining the moderating

effects of the cultural backgrounds of directors on the relationship between board

size and firm performance. Hong Kong contains a mixture of Western and East-

ern cultures, having been a British colony up until 1997, after which its sover-

eignty was transferred to China. Top management teams in Hong Kong typically

have more Chinese executives than Anglo-American executives. The cultures of

Anglo-American directors and ethnic Chinese directors are distinct from each

other. According to Hofstede (2001), people from the United Kingdom, the Uni-

ted States, and Australia exhibit the value patterns of lower power distance (PD)

andhighindividualismandaremoreconcernedwithpersonalgoalsandinterests.

By contrast, Chinese societies exhibit a higher level of collectivism than do Wes-

tern societies (Meindl et al., 1989). People in collectivist societies are concerned

with group interests and harmony, and personal relationships prevail over tasks

(Hofstede, 2001, p. 239).

Because of the distinguishing characteristics of different cultural dimensions,

numerous studies in the fields of accounting and corporate governance examine

cultural perspectives. For example, in a study on the budgetary participation of Chi-

nese and Western managers, Tsui (2001) uses the dimensions of PD, collectivism,

and long-term orientation to characterize the cultural differences between Chinese-

and Western-style management. Chinese-style management involves high collec-

tivism, high PD, and long-term orientation, whereas Western-style management

exhibits the opposite qualities. Accordingly, Anglo-American directors tend to be

more individualistic than Chinese directors. In a Chinese cultural context, Anglo-

American representation may create cultural conflict with Chinese directors, leading

to moderation of the board size effect. Therefore, the present study investigates the

interaction effect of board size (including squared board size) and the proportion

of Anglo-American directors on firm performance to elucidate this complex rela-

tionship.

The remainder of this paper is organized as follows. Section 2 presents a discus-

sion of related literature and describes the development of the study’s hypotheses.

Section 3 describes the data. Section 4 presents the multivariate results and

describes additional robustness tests. Section 5 offers a conclusion and describes the

limitations of this study.

J. C. K. Yeung

108 ©2018 Korean Securities Association