Non-linear relationship of board size and board independence with firm performance – evidence from India

Abstract

Purpose This study aims to examine the significance of the non-linear relationship of board size and board independence on the financial performance of listed non-financial firms in India. Design/methodology/approach The study draws the sample of the listed non-financial firm in the Indian market from the year 2011–2018 and applied panel least squares regression with and without industry fixed effects on the model with quadratic equation. Quantile regression is also used to test the robustness of the results. The financial performance is measured through one accounting measure (i.e. return on assets [ROA]) and one market-based measure (i.e. Tobin’s Q). The empirical model also controls firm-specific variables which are expected to have an impact on financial performance. Findings The study found that the relationship of board size and board independence with the financial performance of a firm is in a non-linear inverted U-shape. The results are qualitatively similar for both ROA and Tobin’s Q after controlling industry fixed effects. Originality/value This is the first study in India which tests the non-linear relationship of board size and board independence with the financial performance of the firm. The study contributes to the limited literature on the implications of board characteristics on the performance of the firms in India.