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

34 Pages Posted: 18 Aug 2020

See all articles by Alexander Ljungqvist

Alexander Ljungqvist

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

Konrad Raff

Norwegian School of Economics (NHH)

Multiple version iconThere are 2 versions of this paper

Date Written: August 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, deadlock, diversity, Monitoring

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 (August 2020). CEPR Discussion Paper No. DP15165, Available at SSRN: https://ssrn.com/abstract=3674954

Alexander Ljungqvist (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

European Corporate Governance Institute (ECGI)

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

Konrad Raff

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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