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The Impact of Board Diversity on Boards' Monitoring Intensity and Firm Performance: Evidence from the Istanbul Stock Exchange

33 Pages Posted: 24 Mar 2010 Last revised: 14 Mar 2015

Melsa Ararat

Sabanci University - School of Management, Corporate Governance Forum

Mine H. Aksu

Sabanci University

Ayse Tansel Cetin

Sabanci University

Date Written: April 2010

Abstract

The main objective of this paper is to investigate the impact of board diversity on the financial performance of the ISE-100 index firms traded in the Istanbul Stock Exchange (ISE). We use gender and generation differences as observable attributes and directors’ educational and nationality backgrounds as proxies of non-observable attributes of values, beliefs, skills and competencies. We combine these different diversity indicators with "independence" through a diversity index, to account for the critical mass of diverse opinions needed for critical inquiry. We use market-to-book ratio and Tobin’s Q as our market based and return on equity as our accounting based measures of performance.

Second, to understand the process by which board diversity affects firm performance, we focus on the relationship between board diversity and the board’s monitoring intensity, on the one hand, and monitoring intensity and firm performance, on the other. We define a board’s monitoring intensity as a composite mediating variable consisting of the number of board meetings, the number of board committees, auditing and financial reporting quality of the firm and its disclosure intensity. We find a positive relationship between board diversity and performance and board diversity and board monitoring intensity. Furthermore, not only does monitoring intensity impact performance, but it also decreases the explanatory power of most of our board diversity measures when it enters the model in the diversity-performance estimations. Overall, our results suggest that diverse boards are better monitors, mitigating agency conflict and enhancing firm performance. We expect that the findings would be of interest for researchers, investors, shareholders, boards, and regulators.

Keywords: Corporate governance, board diversity, board monitoring, disclosure, firm performance, ownership concentration

JEL Classification: G3, J16, L25

Suggested Citation

Ararat, Melsa and Aksu, Mine H. and Tansel Cetin, Ayse, The Impact of Board Diversity on Boards' Monitoring Intensity and Firm Performance: Evidence from the Istanbul Stock Exchange (April 2010). Available at SSRN: https://ssrn.com/abstract=1572283 or http://dx.doi.org/10.2139/ssrn.1572283

Melsa Ararat (Contact Author)

Sabanci University - School of Management, Corporate Governance Forum ( email )

Orhanli Tuzla
Istanbul, Orhanli, Tuzla 34956
Turkey
+90-2164839710 (Phone)
+90-2164839715 (Fax)

HOME PAGE: http://www.sabanciuniv.edu

Mine H. Aksu

Sabanci University ( email )

School of Management
Istanbul, Orhanli, Tuzla 34956
Turkey
+90 216 483 9678 (Phone)
+90 216 483 9699 (Fax)

HOME PAGE: http://people.sabanciuniv.edu/~maksu

Ayse Tansel Cetin

Sabanci University ( email )

Orta Mahalle Üniversite Caddesi 27
Istanbul, Orhanli, 34956 Tuzla 34956
Turkey

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