The inverse U-shaped relationship between board size and investment efficiency: international evidence

Purpose This study examines how board size shapes firms’ investment efficiency by addressing the conflicting theoretical and empirical predictions in the corporate governance literature. Specifically, it investigates whether the relationship is non-linear and identifies the point at which board size enhances or impairs capital allocation decisions. Design/methodology/approach This study uses an international panel dataset of 20,590 firm-year observations across 32 countries from the LSEG and World Bank databases. The empirical analysis employs panel regression models with firm and country-level controls, complemented by robustness tests using two-stage least squares (2SLS) and system generalised method of moments (system GMM) to address endogeneity and dynamic effects. Findings The results reveal a significant inverse U-shaped relationship between board size and investment efficiency. Board size enhances efficiency at lower levels, but beyond an optimal threshold of approximately 15 directors, additional members reduce efficiency. This pattern reflects a trade-off between improved monitoring and resource provision, and increased coordination costs and decision inefficiencies. The effect is stronger in developed markets and high-competition environments, and weaker in emerging and non-common law settings. Research limitations/implications This study contributes to the corporate governance literature by reconciling conflicting theoretical predictions through a non-linear framework. The result demonstrates that the impact of board size on investment efficiency is not monotonic and provides an explanation for the mixed empirical evidence reported in prior studies. Practical implications This study provides valuable insights for policymakers, emphasising the importance of carefully considering the limit on board size as an important corporate governance mechanism. Firms should align board size with the optimal range to balance monitoring effectiveness and coordination costs, particularly in competitive and well-developed institutional environments. Furthermore, this study assists investors in evaluating governance quality by highlighting the performance implications of board structure. Originality/value This study makes a novel contribution by being the first to identify and quantify the optimal board size that maximises investment efficiency using a large multi-country dataset. By shifting the focus from linear to non-linear effects, it offers a more complete understanding of how board structure influences firms’ investment decisions.