Board Diversity, Firm Risk, and Corporate Policies
97 Pages Posted: 18 Feb 2016 Last revised: 15 Jul 2017
Date Written: March 6, 2017
We examine the effects of diversity in the board of directors on corporate policies and risk. Using a multi-dimensional measure, we find that greater board diversity leads to lower volatility and better performance. The lower risk levels are largely due to diverse boards adopting more persistent and less risky financial policies. However, consistent with diversity fostering more efficient (real) risk-taking, firms with greater board diversity also invest persistently more in R&D and have more efficient innovation processes. Instrumental variable tests that exploit exogenous variation in firm access to the supply of diverse nonlocal directors indicate that these relations are causal.
Keywords: diversity, board of directors, risk, financial policies, innovation, performance
JEL Classification: G30, G32, G34
Suggested Citation: Suggested Citation