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Independent director attention and the cost of equity capital
Author(s) -
Huang Henry He,
Wang Chong,
Xie Hong,
Zhou Jian
Publication year - 2021
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12522
Subject(s) - cost of capital , cost of equity , equity capital markets , equity (law) , business , implicit cost , accounting , economics , weighted average cost of capital , finance , actuarial science , financial capital , microeconomics , total cost , capital formation , profit (economics) , valuation (finance) , political science , law
Abstract We study the relation between independent director attention and the cost of equity capital. Masulis and Mobbs find that a director with multiple directorships distributes her time and effort (i.e., attention) unequally according to the relative prestige of each directorship. We investigate whether a firm's cost of equity capital reflects such unequal distribution of attention by its directors. We find that firms receiving more director attention are associated with a lower cost of equity capital. These firms also have higher accounting information quality. Moreover, the attention from audit committee directors matters more than that from other directors in reducing the cost of equity capital. Robustness checks show that the results are not driven by firm size. Overall, our evidence is consistent with director attention reducing the cost of equity capital through effective monitoring that increases accounting information quality.