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Board Size, Firm Risk, and Equity Discount
Author(s) -
Upadhyay Arun
Publication year - 2015
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/jori.12033
Subject(s) - equity value , endogeneity , debt , monetary economics , equity (law) , business , equity risk , equity premium puzzle , debt to equity ratio , economics , equity ratio , financial economics , risk premium , finance , internal debt , valuation (finance) , econometrics , debt levels and flows , sociology , political science , law , nonprobability sampling , population , demography
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.