Board Size, Firm Risk and Equity Discount

The Journal of Risk and Insurance, Forthcoming

41 Pages Posted: 20 Mar 2008 Last revised: 10 Apr 2014

See all articles by Arun Upadhyay

Arun Upadhyay

Florida International University

Date Written: December 15, 2013

Abstract

Prior literature documents that larger boards pursue conservative investment policies and that their decision outcomes are moderate which promote an environment of risk-aversion. I argue that this risk-aversion hurts equity holders when firms hold a larger amount of long-term debt. Addressing potential endogeneity problems associated with board size, I find an equity discount associated with larger boards in firms that have greater amounts of long-term debt. On the other hand, larger boards are associated with an equity premium when firms have a greater short-term debt to assets ratio. The equity discount associated with larger boards disappears in firms with no long-term debt. Further analysis also indicates that firms with larger boards enjoy a better credit rating and a lower realized cost of debt. Overall, analysis in this study suggests that the association between board size and equity value is a function of a firm’s debt structure.

Keywords: Board size, inside directors, corporate governance, agency cost of debt

JEL Classification: G32, G34, K22

Suggested Citation

Upadhyay, Arun, Board Size, Firm Risk and Equity Discount (December 15, 2013). The Journal of Risk and Insurance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1106570 or http://dx.doi.org/10.2139/ssrn.1106570

Arun Upadhyay (Contact Author)

Florida International University ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

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