Board Diversity and Firm Performance Volatility

Board Diversity and Firm Performance Volatility

Mariassunta Giannetti, Mengxin Zhao

Series number :

Serial Number: 
462/2016

Date posted :

March 01 2016

Last revised :

March 17 2016
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Keywords

  • board • 
  • diversity • 
  • volatility

Diverse directors may have diverse preferences over firms' policies and objectives. As shown by Arrow (1951), diverse individual preferences may fail to univocally aggregate in collective preferences and may consequently lead to arbitrary and volatile decisions. Using the board of directors as a laboratory, we test whether diversity leads to higher performance volatility.

We show that firms with more diverse boards have greater stock return and fundamental volatility suggesting that board diversity indeed makes decision-making more erratic. Also, firms with diverse boards have less persistent strategies and analysts make larger forecast errors in predicting their performance supporting the conjecture that board members' diverse preferences lead to hard to predict decisions. Consistent with the presence of conflicts in the boardroom, we find that executive and director turnovers are higher in firms with diverse boards. These firms also have more board meetings. We find no evidence that our results may be driven by firm risk-taking or complexity.

Authors

Professor
Real name:
Mengxin Zhao
Alberta School of Business, University of Alberta