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Keywords:

  • board size;
  • corporate governance;
  • transparency;
  • cost of capital

Abstract:  Prior academic research has found a discount for equity holders but a premium for bondholders of firms with large boards. We argue that these results could have been impacted by the relation between board size and corporate information environment, which is absent in prior empirical analyses. In this study, we examine the impact of board size on both the equity holders and bondholders by analyzing how board size affects the information environment of a firm. Using a sample of S&P 1500 firms, our study finds that board size is positively associated with variables that proxy for information transparency. Further tests indicate that firms with larger boards pay lower weighted average cost of capital and that the discount is greater for firms that are less transparent. We find that firms with greater transparency do not benefit from larger boards. These results hold even when we use alternative measures of cost of capital. Overall, the results suggest that investors perceive larger boards as providing a more transparent information environment, which leads to a lower cost of capital for the firm.