Impact of board size on the accounting returns and the asset quality of Indian banks

Abstract

Purpose The purpose of the paper is to explore the impact of board size on the accounting returns and asset quality of Indian banks. Design/methodology/approach This paper uses ordinary least squares regression, robust regression and panel data methods for estimation, based on data collected for a sample of 29 Indian banks that are listed on the National Stock Exchange (NSE) and form part of the NSE-500 index over a period of eight financial years 2009-2016. The data pertaining to the board size of the sample banks is collected from the annual reports of banks, whereas the data relating to return on assets (ROA) and ratio of the gross non-performing assets to total assets and control variables (bank age and bank size) is extracted from ACE Equity database. Findings This paper concludes that the size of the governing board has a positive impact on the accounting returns (measured through ROA) of the Indian banks. Further, board size is observed to be insignificant in determining the asset quality of Indian banks. Originality/value This paper contributes to the literature and practitioners in a number of ways. First, to the best of the authors’ knowledge, this is the first study on the impact of board size on the accounting returns and asset quality of Indian banks. The findings of the study contribute new theoretical insights to the body of knowledge on the influence of the size of the board, which may be useful for future researchers. Second, banks may enhance their financial performance by taking cognizance of the findings of this study. Finally, equity investors may make use of the findings of this article in deciding on whether to invest in a bank’s stock/lend to the bank based on board size of the bank.

Board composition and firm performance: empirical evidence from Indian companies

“…According to these results, H1 cannot be rejected for the companies in the sample at all performance levels. The findings are in line with those of Gerged and Agwili (2020), Shukla et al (2020), Ciftci et al (2019), Mishra and Kapil (2017) and Puni and Anlesinya (2020), who obtained positive relation between BS and the performance of companies. It reveals that the appointment of additional directors on the board of Indian companies leads to better monitoring of the managers, thereby supporting the agency theory.…”

“…According to these results, H1 cannot be rejected for the companies in the sample at all performance levels. The findings are in line with those of Gerged and Agwili (2020), Shukla et al. (2020), Ciftci et al.…”

“…The stewardship theory supports this argument by affirming that managers act as the stewards of the company, and hence, companies do not need a large board size (Donaldson and Davis, 1991;McLeod et al, 2021;Mishra and Kapil, 2018). However, one must also consider that enlarging the board size adds more experienced and skillful directors to the board, which further improves the managers' monitoring and control (Aslam and Haron, 2020;Kyere and Ausloos, 2020;Shukla et al, 2020). The agency theory supports this idea by arguing that large boards can manage and control the managers better; therefore, the more is the number of directors participating in management activities, the more vigilant the board is in terms of agency problems (Mishra and Kapil, 2018;Puni and Anlesinya, 2020).…”

“…In the same year, Kyere and Ausloos (2020) analysed 252 companies in the UK for 2014 and also revealed positive board size and performance link, as assessed by Tobin's Q and ROA. Shukla et al (2020) explored the influence of board size on the performance of 29 Indian banks from 2009 2016. The authors revealed positive linkages between the two variables, where the performance was gauged via ROA.…”

“…, 2021; Mishra and Kapil, 2018). However, one must also consider that enlarging the board size adds more experienced and skillful directors to the board, which further improves the managers' monitoring and control (Aslam and Haron, 2020; Kyere and Ausloos, 2020; Shukla et al. , 2020).…”