Does board diversity influence idiosyncratic risk: Empirical evidence from Chinese listed firms

ABSTRACT

This study examines the relationship between board diversity, measured as cognitive (tenure, expertise, and education) and demographic (age, gender, and nationality) diversities, and idiosyncratic risk for 2000 Chinese non-financial firms from 2008 to 2020. This study highlights that cognitive board diversity has a more significant impact than demographic board diversity in mitigating idiosyncratic risk. After conducting sensitivity analysis and addressing endogeneity, the Capital Asset Pricing Model and Two-Stage-Least-Square findings confirm the robustness of results across different idiosyncratic risk measures, revealing a notable influence of board diversity on idiosyncratic risk. This study's findings provide valuable insights for practitioners that demographic and cognitive-oriented diversities should be perceived as an essential part of corporate governance in influencing overall corporate performance.

KEYWORDS:

• demographic board diversity
• cognitive board diversity
• total board diversity
• idiosyncratic risk
• emerging market

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Previous research examined procedures for group decision-making. Adams and Ferreira (2009) show that individuals tend to take more risks than organisations do (groups tend to make more moderate decisions). This implies that knowledge shared by a diverse set of board members enhances group discussions and hence such a board takes informed decisions. Additionally, CEO power may result in negative outcomes for firms. For example, Adams et al. (2005) report that powerful CEOs have the ability to make unchecked decisions, which may stimulate the firm risks.

2 Blau index = 1−(0.20²+0.20²+0.20²) = 0.88

3 Fama and French model: Fama 3, Fama 4 and Fama 5.