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

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