Board diversity and corporate risk: evidence from China

Abstract

PurposeThe purpose of this study shows how overall board diversity influences corporate risk-taking. Board diversity is quantified into task-oriented diversity (tenure and education) and relation-oriented diversity (age and gender). Further, this study tests whether the association of board diversity and corporate risk varies across state-owned firms (SOEs) and non-state-owned firms (NSOEs).Design/methodology/approachThe authors used a sample of Chinese listed firms over the period 1999-2017. The results are estimated using the fixed-effects model. To deal with the endogeneity problem and single model bias, the authors use a dynamic model, i.e. two-step generalized method of moment’s model.FindingsThe results show that both task-oriented and relation-oriented diversity reduces corporate risk. Further, the authors document that overall board diversity reduces risk-taking across different types of firms, that is, SOEs and NSOEs. These results are consistent after controlling for endogeneity problems.Practical implicationsThe results provide implications for enhancing corporate governance practices by considering overall board diversity as an important factor influencing corporate decisions. The findings suggest that policymakers and shareholders should consider different diversity attributes important for the composition of a board, which can enhance board outcomes.Originality/valueMost of the prior studies considered only one dimension of diversity, and therefore, have overlooked the overall board diversity. Unlike prior studies, this study considers four board diversity attributes – age, gender, tenure and education, and further tests their association with corporate risk. Further, this study also examines the effect of overall diversity on corporate risk in SOEs and NSOEs.