Independent Director Attention and the Cost of Equity Capital
Journal of Business Finance & Accounting, Forthcoming
46 Pages Posted: 18 Feb 2021
Date Written: February 2, 2021
We study the relation between independent director attention and the cost of equity capital. Masulis and Mobbs (2014; 2017) 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.
Keywords: Independent director, director attention, board monitoring, cost of equity capital
JEL Classification: M41; G34
Suggested Citation: Suggested Citation