Board Diversity and Firm Performance: The Role of Business Group Affiliation

International Business Review, Forthcoming

Posted: 13 Aug 2019

See all articles by Raj Aggarwal

Raj Aggarwal

Federal Reserve Banks - Federal Reserve Bank of Cleveland; University of Akron; Kent State University; Kent State University Foundation

Varun Jindal

Indian Institute of Management (IIMB), Bangalore

Rama Seth

Copenhagen Business School

Date Written: August 7, 2019

Abstract

There is little consensus globally on the relationship between board diversity and firm performance. Using the resource dependence and agency views, this paper examines how business group affiliation influences the relationship between board diversity and firm performance as a contextual/confounding factor. Based on data for listed firms in India, we find that board demographic diversity is positively associated with the firm performance (Tobin’s Q) of standalone firms, but this association is negative for group-affiliated firms. This negative effect of group affiliation is confirmed in a test based on a novel measure of firm performance using the stock market reaction to the announcement of mergers and acquisitions. For both measures of performance, we show that business group affiliation impairs the positive firm value effects of board demographic diversity. These findings imply that the relationship between board diversity and firm performance requires re-examination in the many countries where group affiliation is common. Our results also provide evidence of a new cost of group affiliation and show in a fresh context that cross-country studies should account for international variations in ownership and institutional structures.

Keywords: Board Diversity, Business Groups, Corporate Governance, India, Institutional Structure, Mergers and Acquisitions (M&A)

Suggested Citation

Aggarwal, Raj and Aggarwal, Raj and Jindal, Varun and Seth, Rama, Board Diversity and Firm Performance: The Role of Business Group Affiliation (August 7, 2019). International Business Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3435406

Raj Aggarwal

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

University of Akron ( email )

Akron, OH 44325-4803
United States

Kent State University ( email )

College of Business Administration
Kent, OH 44242-0001
United States

Kent State University Foundation ( email )

Akron, OH 44325-4803
United States

Varun Jindal (Contact Author)

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

Rama Seth

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
+45 3815 3815 (Phone)

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