Boardroom Diversity and the Performance and Risk-taking of Financial Institutions: A Comparative Study of Emerging and Developed Markets

Abstract

This study investigates two samples from emerging and developed markets, respectively, to test hypotheses on the relationship between board diversity and the performance as well as risk-taking of financial institutions. In our study of 79 financial firms from the developed market of United States (USA) and 82 firms from eight emerging markets in the Asia-Pacific region (APAC), our primary findings are obtained from firm fixed effects regressions on a sample covering the years 2011-2020. Four director characteristics are measured to capture board diversity: Director gender, skills, network, and tenure. Firstly, we find that changes to board diversity have no significant linear impact on performance of financial institutions in APAC, while evidence suggests that increases in the proportion of female directors and director networks negatively affect performance in USA. However, when examining curved relationships, we find a U-shaped link between changes to the financial literacy of the board and Tobin’s Q in APAC. Turning to risk, our results indicate that changes to the proportion of female directors increases risk-taking while changes to director tenure decreases risk-taking in APAC. In USA, a similar positive link between changes to gender diversity and risk-taking is found. It is complemented by findings of a positive relationship between changes in the financial skill level of the board and risk-taking, although a subsequent inverse U-shaped relationship provides moderation to this pattern. Variations to the scope of director networks has no linear impact on risk-taking in either region. We attribute differences observed between the two regions to the premature context of corporate governance in emerging markets, limiting the importance of board diversity for firms.