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
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: Suggested Citation
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