The effects of firm performance on corporate governance

Purpose – The purpose of this paper is to investigate the effects of prior firm performance on board composition and governance structure. Design/methodology/approach – A total of 90 companies listed on National Association of Securities Dealers Automated Quotations were used for this study. Hypotheses were tested using both general linear regression and logit regression analyses. Findings – The results showed that prior negative change in firm performance was significantly related to a decrease in the overall number of directors and a decrease in the number of outside directors. Research limitations/implications – The sample size used in this study was relatively small and the focus was on small to medium‐sized firms, so the results found here may not apply to firms larger than those used in our sample. Practical implications – Directors may want to consider the implications for governance practices found in this study, specifically, whether smaller boards with fewer outsiders are appropriate following periods of performance decline. Originality/value – This study is one of the first to examine the effects of trends in prior firm performance on board composition and chief executive officer duality.