Director Capital and Corporate Disclosure Quality

Abstract

We investigate the role of director human and social capital on board oversight, focusing on one specific component of board efficacy, namely the disclosure quality. One role of the board involves deciding upon the depth and degree of the firm’s financial disclosures. To test the idea that high capital boards seek to provide greater disclosure quality to investors, we manually collect data on director attributes and apply factor analysis to measure the networking, educational, and experience capital of the board. The results indicate that board capital is positively related to disclosure quality, with differing key attributes for inside and outside directors. Further tests indicate that board capital has a positive impact on firm performance, which is, to some extent, attributable to greater disclosure quality. These results are robust to 2SLS and difference-on-difference approaches. More importantly, we find the firms which disclose more on the directors’ human capital enjoy a higher valuation, suggesting that investors have difficulty determining this information on their own.