Independent Director Diligence and the Cost of Equity Capital—Evidence From the Performance Reports of Independent Directors

Based on the key focus areas in independent directors' performance reports, we investigate the impact of independent director (ID) diligence on equity capital cost using a sample of listed companies in China from 2015 to 2022. We find that firms with more diligent IDs experience significantly lower cost of equity. The effect is especially pronounced when IDs focus on investor return, external guarantees and capital occupation, and the usage of raised funds. Mechanism tests suggest that ID diligence reduces the cost of equity capital by alleviating two types of agency problems and improving information transparency. The impact of ID diligence on the cost of equity capital is stronger in firms with higher fraud risk, weaker equity balance, and lower external attention. The economic consequence tests further show that ID diligence can relieve financing constraints and increase firm value. Our findings inform regulators, investors, IDs, and other stakeholders interested in the economic consequences of ID performance.