There is strong empirical evidence to support the first five of these predictions. For instance, Weisbach’s (1988) results are consistent with the first prediction; Bhagat and Black (2000) and Hermalin and Weisbach (1988) find results that are consistent with the second and third predictions; and, likewise, the fourth prediction is supported by numerous studies, of which Weisbach (1988) is just one example. For the other predictions there is still little evidence.

There are other stylized facts about Boards that do not, as of yet, arise as equilibria from formal models. Would the best Board combine both independent directors (unconflicted, but also uninformed) and insiders (who are conflicted but best informed)? Would the length of service (not too short), age (not too old) and capacity (given by a proxy such as the number of Boards in which director sit) matter? Does the separation between the CEO and the chairman of the Board (which is often a requirement) make a difference? Why does Board _size_ appear to affect performance?

# **6. Enterprise Level Empirical Evidence**

Most work on the connection between Board structures or other aspects of corporate governance and firm value or performance face a set of empirical challenges, which make identification difficult (see Hermalin and Weisbach, 2003). Several recent articles contend that because of these challenges, we still know very little about the effects of Board structure, or corporate governance more generally, on firm value or performance (Chidambaran, Palia and Zheng, 2006; Lehn, Patro and Zhao, 2006; Listokin, 2007).

Both endogeneity considerations and the equilibrium nature of the results complicate empirical work on Boards of Directors, as well as most other empirical work on governance. First, almost all the variables of interest are _endogenous_ . For instance, firm performance is both a result of the actions of previous directors and itself a factor that potentially influences the choice of subsequent directors. A second likely form of endogeneity involves optimal governance varying across firms, based on firm characteristics, so that even if a governance attribute correlates with firm value in crosssection, this does not imply that this attribute would be valuable at other firms (Demsetz and Lehn, 1985). For evidence on the factors that influence Board composition, see, e.g., Boone, Field, Karpoff and Raheja (2007), Gillan, Hartzell and Starks (2006); Agrawal and Knoeber (2001). A third possibility is that firms may use governance to signal good underlying attributes, but governance has no separate effect on value or performance.

In addition, many empirical results on governance can be interpreted as either equilibrium or out-of-equilibrium phenomena, bearing drastically different implications for policy. The out-ofequilibrium interpretation of a negative correlation between Board size and performance would suggest that from a policy perspective limits on Board size should be encouraged. In contrast, the equilibrium interpretation of this result implies that some other factor is causing both Board size and profitability, so that such regulation would be at best useless and possibly counterproductive.

A further problem in many emerging markets is omitted variable bias. Different aspects of governance are often positively correlated. Moreover, a wide range of firm characteristics could plausibly predict both Board structure and firm value or performance. Yet most studies control for a 18