Do Co-opted boards affect the cost of equity capital?

•Board co-option reduces the firm cost of equity capital.•Firms benefit from the advice and unique expertise of co-opted directors.•Investors tend to consider board co-option as a signal of corporate growth opportunity. This paper contributes to the corporate governance and capital market literature...

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Bibliographic Details
Published in:Finance research letters 2022-05, Vol.46, p.102491, Article 102491
Main Authors: Bhuiyan, Md. Borhan Uddin, Sangchan, Pinprapa, Costa, Mabel D'
Format: Article
Language:English
Subjects:
Australia
Co-option
Cost of equity capital
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Summary:•Board co-option reduces the firm cost of equity capital.•Firms benefit from the advice and unique expertise of co-opted directors.•Investors tend to consider board co-option as a signal of corporate growth opportunity. This paper contributes to the corporate governance and capital market literature by documenting the association between board co-option and the cost of equity capital. We argue that board co-option facilitates better CEO-director counselling and better coordination of the CEO-director relationship, which signals future earnings predictability and reduces information risk, resulting in a lower cost of equity capital. Using data from Australian listed companies from 2001 to 2015, our analyses reveal that board co-option is associated, significantly and negatively, with firms’ cost of equity and, thus, supports the beneficial view of board co-option.
ISSN:1544-6123
1544-6131
DOI:10.1016/j.frl.2021.102491