Board Diversity and Firm Performance Volatility

60 Pages Posted: 18 Apr 2016

See all articles by Mariassunta Giannetti

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Mengxin Zhao

Securities and Exchange Commission (SEC)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2016

Abstract

Diverse directors may have diverse preferences over firms' policies and objectives. As shown by Arrow (1951), diverse individual preferences may fail to univocally aggregate in collective preferences and may consequently lead to arbitrary and volatile decisions. Using the board of directors as a laboratory, we test whether diversity leads to higher performance volatility. We show that firms with more diverse boards have greater stock return and fundamental volatility suggesting that board diversity indeed makes decision-making more erratic. Also, firms with diverse boards have less persistent strategies and analysts make larger forecast errors in predicting their performance supporting the conjecture that board members' diverse preferences lead to hard to predict decisions. Consistent with the presence of conflicts in the boardroom, we find that executive and director turnovers are higher in firms with diverse boards. These firms also have more board meetings. We find no evidence that our results may be driven by firm risk-taking or complexity.

Suggested Citation

Giannetti, Mariassunta and Zhao, Mengxin, Board Diversity and Firm Performance Volatility (March 2016). CEPR Discussion Paper No. DP11155. Available at SSRN: https://ssrn.com/abstract=2766447

Mariassunta Giannetti (Contact Author)

Stockholm School of Economics ( email )

P.O. Box 6501
Sveavagen 65
SE-113 83 Stockholm
Sweden
+46 8 736 9607 (Phone)
+46 8 312 327 (Fax)

HOME PAGE: http://sites.google.com/site/mariassuntagiannetti/Home

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Mengxin Zhao

Securities and Exchange Commission (SEC) ( email )

450 Fifth Street, NW
Washington, DC 20549-1105
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
0
Abstract Views
808
PlumX Metrics