Investment Banker Directors and Capital Raising Costs

Abstract

Much of the literature on corporate boards is centered on their monitoring role, yet boards spend a significant portion of their time advising management. Using a large hand-collected data set of investment bankers (IB) on boards, we examine whether and how IB directors affect capital raising costs. We show that seasoned equity issuers with IB directors are associated with higher announcement returns and lower issuance costs, whereas we do not find such association for debt issuance. We further show that the presence of IB directors reduces issuers’ reliance on top underwriters. Additional analyses suggest that IB directors help improve firms’ information environment. Our results highlight the advising role of specialist directors in transactions traditionally dominated by financial intermediaries.

Keywords: Board of directors; advising; investment banker directors; information environment; seasoned equity offerings; cost of capital

JEL Classification: G14, G24, G32