This paper uses minimum board size requirements to assess whether large boards reduce firm performance. Since 1976, the legally required minimum size of German supervisory boards increases from 12 to 16 directors as firms pass 10,000 domestic employees. Board sizes increase sharply at this threshold, indicating that the mandate is binding for many firms. Using a regression discontinuity design around the threshold and a difference-in-differences analysis around the law’s introduction, we find robust evidence that forcing firms to have large boards lowers performance and value. At the threshold, operating return on assets drops by 2-3 percentage points and Tobin’s Q by 0.20-0.25, with similar declines for treated firms after the law’s introduction. Firms just above the threshold also generate lower acquisition announcement returns than firms just below, suggesting that large boards undertake worse acquisitions.

Finance Research Seminars