When Does Board Diversity Benefit Shareholders? Strategic Deadlock as a Commitment to Monitor

35 Pages Posted: 24 Sep 2020 Last revised: 29 Jul 2021

See all articles by Alexander Ljungqvist

Alexander Ljungqvist

Centre for Economic Policy Research (CEPR); Stockholm School of Economics; European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

Konrad Raff

Norwegian School of Economics (NHH)

Multiple version iconThere are 2 versions of this paper

Date Written: July 28, 2021

Abstract

ask how and when a diverse board can benefit shareholders. Board diversity may be value-increasing even if some directors have agendas that are not perfectly aligned with shareholders' interests. Diversity commits the board to a high information standard because directors with opposing agendas are deadlocked unless they have persuasive information in support of the optimal course of action. Since deadlock is costly, diversity strengthens directors' incentives to gather information ex ante and can mitigate free-riding behavior. Diversity is more likely desirable if the firm's information environment is poor and if directors' opposing agendas are accompanied by intermediate incentives for value maximization. However, if directors cannot credibly communicate their information, a homogeneous board may dominate a diverse board.

Keywords: Boards of Directors, Diversity, Monitoring, Deadlock, Moral hazard in teams

JEL Classification: G34

Suggested Citation

Ljungqvist, Alexander and Ljungqvist, Alexander and Raff, Konrad, When Does Board Diversity Benefit Shareholders? Strategic Deadlock as a Commitment to Monitor (July 28, 2021). Swedish House of Finance Research Paper No. 20-24, Available at SSRN: https://ssrn.com/abstract=3672521 or http://dx.doi.org/10.2139/ssrn.3672521

Alexander Ljungqvist

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Stockholm School of Economics ( email )

111 60 Stockholm
Sweden

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Konrad Raff (Contact Author)

Norwegian School of Economics (NHH) ( email )

Department of Finance
Helleveien 30
Bergen, 5045
Norway

HOME PAGE: http://sites.google.com/site/raffkonrad/

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