Board Diversity, Firm Risk, and Corporate Policies

Board Diversity, Firm Risk, and Corporate Policies

66 Pages · 2016 · 1.45 MB · English

Abstract. We examine the impact of director diversity on corporate policies and risk. Using a multi- dimensional diversity index, we find that board diversity leads to significantly lower realized return volatility. This is largely due to diverse boards adopting less risky financial policies. Howev

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1 Board Diversity, Firm Risk, and Corporate Policies Gennaro Bernile, Vineet Bhagwat, and Scott Yonker * February 1, 2016 Abstract We examine the impact of director diversity on corporate policies and risk Using a multi dimensional diversity index, we find that board divers ity leads to significantly lower realized return volatility This is largely due to diverse boards adopting less risky financial polic ies However, consistent with diversity fostering more efficient (real) risk taking, firms with greater board diversity invest more in R&D and produce more and better innovation Although diversity is associated with higher board frictions , performance tests indicate that the gains from diversity outweigh the costs Instrumental variable tests that exploit exogenous variation in firm access to the supply of diverse nonlocal directors indicate t hat these relations are causal JEL classifications: G30, G32, G34 Keywords: diversity, board of directors, risk, financial policies, innovation, performance * Bernile ( [email protected] ) is at the Lee Kong Chian School of Business at Singapore Management University, Bhagwat ( [email protected] ) is at the Lundquist College of Business at the University of Oregon, and Yonker ([email protected] ) is at the Dyson School of Applied Economic s and Management at Cornell University We are grateful to Renée Adams, Stefanos Delikouras, Phil Dybvig, Jianfeng Hu, Byoung Hyoun Hwang, Andrew Karolyi, Alok Kumar, George Korniotis, Roger Loh, Evgeny Lyandres, Ron Masulis, Roni Michaely, Raghu Rau, Ren é Stulz, Johan Sulaeman and Michael Weisbach for their valuable comments and suggestions We also thank seminar participants at Cornell University, Singapore Management University, University of Miami , and University of Oregon for their feedback We take s ole responsibility for all remaining errors and omissions 1 Diversity on corporate boards has gained substantial political and media attention in recent years Since 2008, six countries have adopted binding quotas to promote gender diversity on boards and several others have non binding quotas or are cons idering legislation (Smith, 2014 )1 The economics and social psychology literature s have long recognized that diversity matters for team decision making (Sah and Stiglitz, 1986, 1991; Moscovici and Zavalloni, 1969) In fact, there are numerous studies that examine the impac t of gender diversity of boards , which is typically advocated on the grounds of attaining greater soci al equality or deepening the director talent pool 2 However, it is not clear

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