Journal of Applied Finance & Banking, vol.1, no.

3, 2011, 1-13
ISSN: 1792-6580 (print version), 1792-6599 (online)
International Scientific Press, 2011

Board Size, CEO Duality, and the Value

of Canadian Manufacturing Firms
Amarjit Gill1 and Neil Mathur2

Abstract
The purpose of this study is to examine the impact of board size and the CEO
(Chief Executive Officer) duality on the value of Canadian manufacturing firms.
A sample of 91 Canadian manufacturing firms listed on Toronto Stock Exchange
(TSX) for a period of 3 years [from 2008-2010] was selected. The co-relational
and non-experimental research design was used to conduct this study. The
empirical results show that larger board size (large number of directors) has a
negative impact on the value of Canadian manufacturing firms. The findings also
show that the CEO duality has a positive impact on the value of Canadian
manufacturing firms. In addition, firm size, firm performance, and potential
growth of the firm positively impact on the value of Canadian manufacturing
firms. This study contributes to the literature on the factors that affect value of the
firm. The findings may be useful for the financial managers, investors, and
financial management consultants.

College of Business Administration, Trident University International, 5757 Plaza Drive,

CA, 90630, USA, e-mail: [email protected]
School of Business Administration, Simon Fraser University, 515 W. Hastings St,
Vancouver, BC, V6B 5K3, Canada, e-mail: [email protected]

Article Info: Revised : September 28, 2011. Published online : November 30, 2011

Board Size, CEO Duality, and the Value

JEL classification numbers: G32

Keywords: Board size, CEO duality, firm size, potential growth, firm value

Introduction
This study examines the impact of board size and the CEO duality on the

value of Canadian manufacturing firms. Good corporate governance is believed to

be one of the important factors in improving the value of the firm. Authors such as
Black [1], Klapper and Love [2], Gompers et al. [1], Beiner and Dchmid [4], and
Rouf [5] also argue that corporate governance plays an important role in
improving the value of the firm. Corporate governance is defined as the system by
which business corporations are directed and controlled [6, p. 16].
Financial scandals in Canada (e.g., Livent Inc., Corel Corporation, and Nortel)
[7] and the recent collapse of major corporate institutions in USA, South East Asia,
Europe and Nigeria such as Adelphia, Enron, World Com, Commerce Bank and
XL Holidays have shaken investors faith in the capital markets and the efficacy
of existing corporate governance practices in promoting transparency and
accountability. These scandals have negative impact on the value of the firm. Thus,
these scandal issues have brought to the fore once again the need for the practice
of good corporate governance.
The theoretical underpinnings for the extant research in corporate governance
was stated by Berle and Means [8] from their classic thesis "The Modern
Corporation and Private Property which describes a fundamental agency problem
in modern firms where there is a separation of ownership and control. Since that
time period, different authors have conducted research on corporate governance to
extend Berlie and Means study. For example, Jensen and Meckling [9] defined
agency relationship. The agency relationship is a contract under which one or

Amarjit Gill and Neil Mathur

more persons (principal) engage another person (agent) to perform some service
on their behalf, which involves delegating some decision-making authority to the
agent [10, p. 437].
The growth in the firm value is important to achieve the overall corporate
objectives, to keep the organization in business, and to create a greater prospect
for future opportunities in domestic and as well as in the global market. The board
of directors and the CEO duality play an important role in the growth of the firm
value.
Most empirical studies on corporate governance and firm value have been
conducted on industrial firms. However, there are a very few studies that show the
impact of board size and the CEO duality on the value of the firm. Therefore, this
study examines the impact of board size and the CEO duality on the value of the
Canadian manufacturing firms.
There are a number of variables that are potentially associated with the value
of the firm. In this study, the selection of exploratory variables is based on the
previous empirical work. The choice of proxy variables can be limited, however,
due to data limitations. As a result, the set of proxy variables includes six factors:
board size, CEO duality, firm size, return on assets, potential growth of the firm,
and firm value.
Previous studies [1, 2, 3, 4] show that good corporate governance improves
the value of the firm. There are a very few studies that show the relationships
between board size, CEO duality, and the value of the firm. However, Rouf [5]
has tested the relationship between board size, CEO duality, and firm value and
Mak and Kusnadi [11] have tested relationships between board size and the firm
value. This study seeks to extend previous studies by using data from the
Canadian manufacturing industry.
This study contributes to the literature on the relationships between board
size, CEO duality, and firm value in at least two ways. First, it focuses on
Canadian manufacturing firms while a very limited research has been conducted

Board Size, CEO Duality, and the Value

on such firms recently. Second, this study validates the findings of previous
authors by testing the relationships between board size, CEO duality, firm size,
return on assets, potential growth, and firm value of the sample firms. Thus, this
study adds substance to the existing theory developed by previous authors.

Literature Review
The board of directors is generally composed of inside and outside members.

Inside members are selected from executive officers and the shareholders. Outside
directors are members whose only affiliation with the firm is their directorship [5,
p. 239]. According to Kajola [6, p. 17], the business of a firm is managed under
the direction of a board of directors who delegates to the CEO and other
management staff (the day to day management of the affairs of the firm). The
directors, with their wealth of experience, provide leadership and direct the affairs
of the business with high sense of integrity, commitment to the firm, its business
plans, and long-term shareholder value.
It has been found that the larger board size negatively impacts the value of
the firm. Rouf [5, p. 238] argues that small board size is generally believed to
improve the value of the firm because the benefits by larger boards of increased
monitoring are outweighed by the poor communication and decision making of
larger groups. Lipton and Lorsch [12] and Jensen [13] also describe that the larger
board size is less effective. Thus, the larger board size is not in the favor of the
firm.
However, this is not the case with the CEO duality. If CEO is the director of the
board, the performance of the firm improves [14]. The improvement in firm
performance helps to enhance the value of the firm. Although, it has been found
that the CEO duality improves the firm performance, Kajola [6] argues that
concentration of decision management and decision control in one individuals

Amarjit Gill and Neil Mathur

hands has a negative impact on the boards effectiveness. The empirical studies on
the relationship between board size, CEO duality, and the firm value are as
follows:
Black [1] collected data from Russia and found that a firm's corporate
governance behavior can have a huge effect on its market value.
Gompers et al. [3] used incidence of 24 governance rules to construct a
Governance Index to proxy for the level of shareholder rights at about 1,500
large firms during the 1990s. Authors found that the firms with stronger
shareholder rights had higher firm value; that is, strong corporate governance
improves the value of the firm.
Klapper and Love [2] used data on firm-level corporate governance rankings
across 14 emerging markets to conduct research on the corporate governance.
Their results suggest that firms can partially compensate for ineffective laws and
enforcement by establishing good corporate governance and providing credible
investor protection.
Mak and Kusnadi [11] examined the impact of corporate governance
mechanisms on the firm value by collecting data from Singapore and Malaysia.
They found a negative relationship between the board size and the firm value.
Rouf [5] collected data from Bangladesh to test the relationship between
corporate governance and the value of the firm. Through correlation and
regression analysis, Rouf found a positive relationship between the CEO duality
and the firm value.
In summary, limited availability of literature review shows that both the board size
and the CEO duality affect the firm value. Therefore, it is theorized that the larger
board size has a negative impact on the firm value and the CEO duality has a
positive impact on the firm value in the Canadian manufacturing industry.

Board Size, CEO Duality, and the Value

Method

3.1 Measurement
To remain consistent with previous studies, measures pertaining to i) board
size, CEO duality, and return on assets were taken from Rouf [5], ii) potential
growth of the firm were taken from Su and Vo [15], iii) firm size and Tobins Q
taken from Toledo [16]. The measurements of the independent and dependent
variables are as follows:
Board size (BS) independent variable was measured as number of directors on the
board.
To measure the CEO duality (CD) independent variable, value one (1) was
assigned if the same person occupies the post of the chairman and the chief
executive officer and zero (0) for otherwise.
In addition, three control variables (firm size, return on assets, and potential
growth of the firm) were used.
Firm size (FS) control variable was measured by logarithm of the average total
assets of the firm.
To measure return on assets (ROA) independent variable, net income after tax
scaled by total assets was used.
Potential growth (PG) independent variable was measured as firms market value
(market value of equity) scaled by the book value of assets.
Tobins Q (firm value - Q) dependent variable was measured as market value of
equity plus the book value of debt scaled by the book value of total assets.
The following regression model was used to test the relations of board size, CEO
duality, firm size, return on assets, and potential growth with firm value:
Qi,t = b0 + b1*BSi,t + b2*CDi,t + b3*FSi,t + b4*ROAi,t + b5*PGi,t + i,t
where b0 = Constant of the regression equation
b1, b2, b3, b4, and b5 = Coefficient of BS, CD, FS, ROA, and PG

Amarjit Gill and Neil Mathur

Qi,t - Value of firm i in time t

BSi,t - Number of directors on the board for firm i in time t
CDi,t - CEO duality for firm i in time t
FSi,t - Logarithm of the average total assets of firm i in time t
ROA i,t - Return on assets for firm i in time t
PGi,t - Potential growth of firm i in time t
i,t = the error term

3.2 Data Collection

A database was built from a selection of approximately 400 financial-reports
that were made public by publicly traded companies between January 1, 2008 and
December 31, 2010. The selection was drawn from Mergent Online
[http://www.mergentonline.com/compsearch.asp] to collect a random sample of
manufacturing companies. Out of approximately 400 financial-reports announced
by public companies between January 1, 2008 and December 31, 2010, only 91
financial reports were usable. The cross sectional yearly data were used in this
study. Thus, 91 financial reports resulted to 273 total observations. Since random
sampling method was used to select companies, the sample is considered as a
representative sample.
For the purpose of this study, certain industries were omitted due to the type
of activity. For example, all the companies from the financial services industry
were omitted. In addition some of the firms were not included in the data due to
lack of information for the certain time periods.

3.3 Descriptive Statistics

Table 1 shows descriptive statistics of the collected variables. The

Board Size, CEO Duality, and the Value

explanation on descriptive statistics is as follows:

i) Total observations: 91 x 3 = 273
ii) Q (Tobins Q): 1.48
ii) BS (Board size): 7.47
iii) FS (Firm size): 2.66 million
iv) ROA (Return on assets): 6%
v) PG (Potential growth): 1.71

Table 1:

Descriptive Statistics of Independent, Dependent, and Control

Variables (2008-2010)
Minimum
Maximum
Mean
Std. Deviation
0.64

5.46

1.48

0.81

BS

16

7.47

2.62

FS

0.70

4.52

2.66

0.73

ROA

-0.23

0.40

0.06

0.09

PG

-0.24

8.71

1.71

1.29

Table 2: Pearson Bivariate Correlation Analysis

Q
BS
CD

BS

CD

FS

ROA

PG

0.142

0.230*

0.074

0.438**

0.922**

-0.203

0.117

0.114

0.285**

0.058

-0.099

0.153

0.062

0.003

0.329**

FS
ROA
PG
**
*

Correlation is significant at the 0.01 level (2-tailed)

Correlation is significant at the 0.05 level (2-tailed)

Amarjit Gill and Neil Mathur

Q = Tobins Q
BS = Board size
CD = CEO duality
FS = Firm size
ROA = Return on Assets
PG = Potential growth
Table 2 provides the Pearson correlation for the variables that were used in
the regression model. The Bivariate correlation analysis shows that the value of
Canadian manufacturing firms is positively correlated with the CEO duality,
return on assets, and potential growth (see Table 2).

Regression Analysis, Findings, Conclusion, Limitations,

and Future Research
A negative relationship between board size and the value of Canadian

manufacturing firms was found (see Table 3); that is, the larger board size has a
negative impact on the value of the Canadian manufacturing firms. A Positive
relationship between the CEO duality and the value of the Canadian
manufacturing firms was found; that is, the CEO duality enhance the value of the
Canadian manufacturing firms.
Previous studies [1, 2, 3] found that good corporate governance improves the
value of the firm. Rouf [5] found a positive relationship between the CEO duality
and the value of the firm. Mak and Kusnadi [11] found a negative relationship
between the board size and the firm value. The findings of this paper related the
relationships between board size, CEO duality, and firm value are similar to the
findings of Rouf [5] and Mak and Kusnadi [11]. In addition, the finding of this
paper lend some support to the previous authors argument that good corporate

10

Board Size, CEO Duality, and the Value

governance improves the value of the firm.

Positive relationships between i) firm size and firm value, ii) return on assets
and firm value, and iii) the potential growth and firm value were found (see Table
3); that is, firm size, return on assets, and the potential growth of the firm increase
the value of the Canadian manufacturing firms.

Table 3: OLS Regression Estimates on Factors Affecting Potential Growth a, b, c

[R2 = 0.899; SEE = 0.266; F = 151.075; ANOVAs Test Sig. = 0.000]
Regression Equation: Q = 0.431 - 0.038 BS + 0.143 CD + 0.079 FS + 1.540
ROA + 0.560 PG
Unstandardized

Standardized

Collinearity

Coefficients

Coefficients c

Statistics

Std. Error

0.431

0.129

3.336 0.001

BS

-0.038

0.012

-0.122 -3.235 0.002

0.839 1.193

CD

0.143

0.065

0.081 2.199 0.031

0.877 1.140

FS

0.079

0.039

0.070 2.010 0.048

0.971 1.030

ROA

1.540

0.352

0.163 4.382 0.000

0.863 1.158

PG

0.560

0.025

0.891 22.623 0.000

0.768 1.302

(Constant)

Beta

t Sig. Tolerance

Dependent Variable: Q (Firm value)

Independent Variables: BS, CD, FS, ROA, and PG

Linear Regression through the Origin

VIF

SEE = Standard Error of the Estimate

Note that:

A test for multicollinearity was performed. All the variance inflation factor
(VIF) coefficients are less than 2 and tolerance coefficients are greater than
0.50.

Amarjit Gill and Neil Mathur

11

89.90% (R2 = 0.899) of the variance in the degree of Q can be explained by the
degree of PG, FS, CD, ROA, and BS in the Canadian manufacturing industry.

The analysis of variance (ANOVA) test is also significant at 0.000.

4.1 Conclusion
In conclusion, the larger board size is not in the favor of the Canadian
manufacturing corporations because it has a negative impact on the value of the
firm. Therefore, Canadian manufacturing firms should use an optimal board size
based on firm size.
The CEO duality is in the favor of the Canadian manufacturing firms because
it improves the value of the firm. Although, the CEO duality improves the value of
the firm, it may not be beneficial for the very large multinational firms. The CEO
may take high risk to expand in the global market to increase the value of the firm.
The CEO duality may also lead to an agency problem. For example, the CEO may
not work in the favor of internal and external stakeholders to maximize their
wealth. Therefore, the CEO duality should be used with caution.
Results also show that firm size, return on assets, and the potential growth
improve the value of the Canadian manufacturing firms.

4.2 Limitations
This study is limited to the sample of Canadian manufacturing industry firms.
The findings of this study could only be generalized to manufacturing firms
similar to those that were included in this research. In addition, sample size is
small.

12

Board Size, CEO Duality, and the Value

4.3 Future Research

Future research should investigate generalizations of the findings beyond the
Canadian manufacturing sector. Important control variables such as industry
sectors from different countries, audit committee, board composition, etc., should
also be used.

References
[1] B.S. Black, Does corporate governance matter: A crude test using Russian
data, University of Pennsylvania Law Review, 149, (2001), 2131-2150.
[2] L. Klapper and I. Love, Corporate governance, investor protection, and
performance in emerging markets, Working Paper, (2004).
[http://papers.ssrn.com/sol3/papers.cfm?abstract_id=303979]
[3] P.A. Gompers, J.L. Ishii, and A. Metrick, Corporate governance and equity
prices, Working Paper, (2003).
[http://fic.wharton.upenn.edu/fic/papers/02/0232.pdf]
[4] S. Beiner and M.M. Dchmid, Agency conflict, corporate governance, and
corporate diversification Evidence from Switzerland, Working Paper,
(2005). [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=666264]
[5] M.A. Rouf, The relationship between corporate governance and value of the
firm in developing countries: Evidence from Bangladesh, The International
Journal of Applied Economics and Finance, 5(3), (2011), 237-244.
[6] S.O. Kajola, Corporate governance and firm performance: The case of
Nigerian listed firms, European Journal of Economics, Finance and
Administrative Sciences, 14, (2008), 16-27.
[7] A. Gill, N. Biger, C. Pai, H.S. Mand, and S.P. Sharma, Determinants of the
chief financial officers compensation in the service industry, The Open
Business Journal, 2, (2009), 43-47.

Amarjit Gill and Neil Mathur

13

[8] A. Berle and G. Means, The modern corporation and private property,
Transaction Publishers, United States, (1932).
[9] M.C. Jensen, and W.H. Meckling, Theory of the firm: Managerial behavior,
agency costs and ownership structure, Journal of Financial Economics, 3(4),
(1976), 305-360.
[10] W. Jia, and B. Chen, Corporate governance and its effects on firm value, SEI
2007 Conference in China, (2007), 436-440.
[http://www.seiofbluemountain.com/upload/product/200911/2009cyjdhy4z2a
4.pdf]
[11] Y.T. Mak, and Y. Kusnadi, Size really matters: Further evidence on the
negative relationship between board size and firm value, Pcific-Basin
Finance Journal, 13(3), (2005), 301-318.
[12] M. Lipton, and J.W. Lorsch, A modest proposal for improved corporate
governance, Business Lawyer, 48(1), (1992), 59-78.
[13] M. Jensen, The modern industrial revolution, exit, and the failure of internal
control systems, Journal of Finance, 48, (1993), 831-880.
[14] D. Ramdani and A.V. Witteloostuijn, The impact of board independence and
CEO duality on firm performance: A quantile regression analysis for
Indonesia, Malaysia, South Korea and Thailand, British Journal of
Management, 21(3), (2010), 607-627.
[15] G.S. Su and H.T. Vo, The relationship between corporate strategy, capital
structure and firm performance: An empirical study of the listed companies
in Vietnam, International Research Journal of Finance and Economics, 50,
(2010), 62-71. [http://www.eurojournals.com/irjfe_50_06.pdf]
[16] E.P. Toledo, The relationship between corporate governance and firm value:
A simultaneous equations approach for analyzing the case of Spain, Working
Paper, (2009), 1-50.
[http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1481342]