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Board Size, Corporate Information Environment and Cost of Capital

Authors

  • Arun Upadhyay,

    1. The authors are respectively Assistant Professor of Finance, College of Business, University of Nevada; and CRT Distinguished Professor of Accounting at the School of Accountancy, J. Mack Robinson College of Business, Georgia State University. They would like to thank an anonymous referee, Steven Young (Associate Editor), David Reeb, Steve Balsam, Zhouhui Chen, Jay Choi, Elyas Elyasiani, Ken Kopecky and Ram Mudambi for helpful comments and suggestions.
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  • Ram Sriram

    Corresponding author
    1. The authors are respectively Assistant Professor of Finance, College of Business, University of Nevada; and CRT Distinguished Professor of Accounting at the School of Accountancy, J. Mack Robinson College of Business, Georgia State University. They would like to thank an anonymous referee, Steven Young (Associate Editor), David Reeb, Steve Balsam, Zhouhui Chen, Jay Choi, Elyas Elyasiani, Ken Kopecky and Ram Mudambi for helpful comments and suggestions.
    Search for more papers by this author

Arun Upadhyay, Assistant Professor of Finance, College of Business/0024, University of Nevada, Reno, Nevada 89557-0024, USA. e-mail: aupadhyay@unr.edu

Abstract

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.

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