Board Diversity and Corporate Risk Taking
59 Pages Posted: 23 Mar 2014 Last revised: 10 May 2018
Date Written: January 24, 2018
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: Suggested Citation