Journal of Business Finance & Accounting, 38(9) & (10), 1238–1261, November/December 2011, 0306-686X doi: 10.1111/j.1468-5957.2011.02260.x Board Size, Corporate Information Environment and Cost of Capital ARUN UPADHYAY and RAM SRIRAM ∗ Abstract: Prior academic research has found a discount for equity holders but a premium for bondholders of firms with large boards. We argue that these results could have been impacted by the relation between board size and corporate information environment, which is absent in prior empirical analyses. In this study, we examine the impact of board size on both the equity holders and bondholders by analyzing how board size affects the information environment of a firm. Using a sample of S&P 1500 firms, our study finds that board size is positively associated with variables that proxy for information transparency. Further tests indicate that firms with larger boards pay lower weighted average cost of capital and that the discount is greater for firms that are less transparent. We find that firms with greater transparency do not benefit from larger boards. These results hold even when we use alternative measures of cost of capital. Overall, the results suggest that investors perceive larger boards as providing a more transparent information environment, which leads to a lower cost of capital for the firm. Keywords: board size, corporate governance, transparency, cost of capital 1. INTRODUCTION One of the most important roles of an effective corporate board is to assure the quality and integrity of information provided by managers to shareholders. Two attributes that affect a board’s effectiveness are the presence of outside directors and board size (Jensen, 1993). Prior studies have examined the importance of outside directors to a board’s effectiveness. For example, Beasley (1996) and Dechow et al. (1996) report that the presence of outside directors tend to reduce the likelihood of financial fraud. Klein (2002) and Bowen et al. (2008) point out that independent directors are more effective in discouraging managers from engaging in earnings management. We add to this stream of literature by investigating the association between another important characteristic of corporate boards, board size, and its influence on a ∗ The authors are respectively Assistant Professor of Finance, College of Business, University of Nevada; and CRT Distinguished Professor of Accounting at the School of Accountancy, J. Mack Robinson College of Business, Georgia State University. They would like to thank an anonymous referee, Steven Young (Associate Editor), David Reeb, Steve Balsam, Zhouhui Chen, Jay Choi, Elyas Elyasiani, Ken Kopecky and Ram Mudambi for helpful comments and suggestions. (Paper received April 2010, revised version accepted July 2011) Address for correspondence: Arun Upadhyay, Assistant Professor of Finance, College of Business/0024, University of Nevada, Reno, Nevada 89557-0024, USA. e-mail: aupadhyay@unr.edu C  2011 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. 1238 Journal of Business Finance & Accounting