Does board diversity mitigate firm risk-taking? Empirical evidence from China

Furman Ali; Bai Gang; Zohaib Zahid

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Need to know

We examine the effect of board diversity on firm risk in the Chinese stock market.
Board diversity significantly reduces the firm risk.
A diverse board effectively manages risk management activities and improves firm performance.
The effect of CBD is more pronounced than DBD in relation to firm risk.

Abstract

Based on group diversity and group performance theories, this paper examines the relationship between firm risk and board diversity measured in demographic dimensions (age, gender and nationality) and cognitive-oriented dimensions (tenure, expertise and education). Using data on nonfinancial firms in China for the period 2008–19, we find that total board diversity, in both the demographic and cognitive-oriented dimensions, is negatively related to a firm’s risk. The cognitive-oriented dimension is more important to the firm’s risk than the demographic dimension of board diversity. Our findings also show that a diverse board effectively manages risk management activities and improves firm performance. Our results are found to be robust using the generalized method of moments. They suggest that more diverse boards can improve group performance, lead to a better decision-making process and reduce firm risk.

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