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

31 Pages Posted: 24 Sep 2020 Last revised: 28 Sep 2020

See all articles by Alexander Ljungqvist

Alexander Ljungqvist

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

Konrad Raff

Norwegian School of Economics (NHH)

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Date Written: August 12, 2020

Abstract

We ask when and how 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, which raises expected firm value. Diversity is more likely desirable if the firm's information environment is poor and if directors' opposing agendas are accompanied by sufficiently strong incentives for value maximization. However, if directors cannot credibly communicate their information, a homogeneous board dominates a diverse board.

Keywords: Boards of Directors, Diversity, Monitoring, Deadlock

JEL Classification: G34

Suggested Citation

Ljungqvist, Alexander and Raff, Konrad, When Does Board Diversity Benefit Shareholders? Strategic Deadlock as a Commitment to Monitor (August 12, 2020). 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

Stockholm School of Economics ( email )

111 60 Stockholm
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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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