Board Network,Information Environment And Cost Of Equity

This paper studies how the interlocked directors affect the corporate’s cost of equity by diffusing information through the board network from the asymmetric information perspective.Based on a sample of A shares from 2009 to 2013 and measured the cost of equity by PEG model,it finds that:92% of the listed companies have been interlocked with other firms by its board members in 2013 and financial institutions are at the center of this network.The average link for a corporate is affected by the IPO trend.12% of the board directors have director positions for more than 2 listed companies while the independent directors have more affluent links than the non-independent directors.Measured by the PEG model,the average cost of equity of listed companies in 2009 to 2013 is 11.72%.but it varies with year and industry.Real estate \banking and iron steel rank the highest while military industrial\media\leisure service enjoy the lowest.A regression of cost of equity on board network centrality finds that firms with directors that have higher network centrality have a lower cost of equity,especially for those that have severe information asymmetry measured by analyst coverage.Further comparing test show that the non-independent directors’ board link matters more than the independent directors’.Therefore it concludes that the interlocked directors can reduce the information asymmetry and cost of equity by diffusing information through its personal network.The result is robust with replacing directors’ centrality by firms’ centrality.