Board Diversity and Corporate Risk Taking

59 Pages Posted: 23 Mar 2014 Last revised: 10 May 2018

See all articles by Maretno A. Harjoto

Maretno A. Harjoto

Pepperdine University - Pepperdine Graziadio Business School (PGBS)

Indrarini Laksmana

Kent State University - Department of Accounting

Ya-Wen Yang

Wake Forest University - Schools of Business

Date Written: January 24, 2018

Abstract

This study examines the association between board diversity and corporate risk taking. Research on board diversity has focused on gender diversity, leaving board diversity beyond gender diversity largely unexplored. We construct diversity indexes to measure board diversity in multiple dimensions, including gender, race, age, experience, tenure, and expertise. We use five variables to proxy for corporate risk taking: capital expenditures, R&D expenses, acquisition spending, the volatility of stock returns, and the volatility of accounting returns. We find that firms with more diverse boards are more risk averse, spending less on capital expenditure, R&D, and acquisitions, and exhibiting lower volatilities of stock returns and accounting returns than those with less diverse boards. Our additional analysis shows that firms with more diverse boards are more likely to pay dividends, as well as pay greater amount of dividend per share than their counterparts, confirming that board diversity is negatively associated with risk taking. We also find strong evidence that board diversity significantly curbs excessive risk taking for firms with above industry median risk taking activities. Our results shed light on the desirability of recent legal and disclosure requirements to enhance board diversity and provide implications that nominating and governance committees should consider in forming the best practices for board composition.

Keywords: Board diversity, board effectiveness, board composition, corporate risk-taking

JEL Classification: M14, G30, G34, G38

Suggested Citation

Harjoto, Maretno Agus and Laksmana, Indrarini and Yang, Ya-Wen, Board Diversity and Corporate Risk Taking (January 24, 2018). Available at SSRN: https://ssrn.com/abstract=2412634 or http://dx.doi.org/10.2139/ssrn.2412634

Maretno Agus Harjoto

Pepperdine University - Pepperdine Graziadio Business School (PGBS) ( email )

Drescher Campus Suite 344
24255 Pacific Coast Highway
Malibu, CA 90263
United States
(310) 506-8542 (Phone)
(310) 506-4126 (Fax)

HOME PAGE: http://scholar.google.com/citations?hl=en&user=9-PfQi0AAAAJ

Indrarini Laksmana

Kent State University - Department of Accounting ( email )

P.O. Box 5190
Kent, OH 44242-0001
United States

Ya-Wen Yang (Contact Author)

Wake Forest University - Schools of Business ( email )

P.O. Box 7659
Winston-Salem, NC 27109-7285
United States
336-758-2934 (Phone)

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