Diversity Matters: A Study on the Relationship between Board Career Diversity and Firm Performance
Abstract
:1. Introduction
“Strength Lies in Differences, Not in Similarities.”—Stephen R. Covey
2. Data and Hypotheses
2.1. Sample
2.2. Proxy for Career Diversity
2.3. Other Key Variables
2.4. Performance Variables
2.5. Control Variables
2.6. Hypothesis
2.6.1. Industry-Diversified Directors and Firm Performance
2.6.2. Variation across Industries
3. Main Findings
3.1. Industry-Diversified Directors and Firm Performance
3.2. Variation across Industries
4. The Channel
4.1. Advisory Role
4.2. Monitoring Role
5. Robustness Checks
6. Conclusions
Author Contributions
Funding
Institutional Review Board Statement
Informed Consent Statement
Data Availability Statement
Conflicts of Interest
References
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Panel A. Prior FF 48 industry experience before joining a board (Director) | |||||||||
Variables | Obs. | Mean | St dev | Min | Median | Max | |||
D (Experience in same industry) | 26,651 | 0.278 | 0.448 | 0 | 0 | 1 | |||
# of other industries with experience | 26,651 | 1.539 | 1.259 | 0 | 1 | 12 | |||
Total # of industries with experience | 26,651 | 1.817 | 1.219 | 1 | 1 | 12 | |||
Panel B. Distribution of the number of prior FF 48 industry experiences | |||||||||
Number of industries with prior experience | |||||||||
1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9+ | |
# of Director | 8644 | 3336 | 1594 | 738 | 304 | 133 | 61 | 20 | 14 |
58.23% | 22.47% | 10.74% | 4.97% | 2.05% | 0.90% | 0.41% | 0.13% | 0.09% | |
Panel C. Industries that hire directors with diverse industry experience | |||||||||
Top | Industry | # of ind’s | Bottom | Industry | # of ind’s | ||||
1 | Entertainment | 2.18 | 1 | Fabricated products | 1.52 | ||||
2 | Real estate | 2.09 | 2 | Candy and soda | 1.63 | ||||
3 | Other | 2.08 | 3 | Apparel | 1.66 | ||||
4 | Printing and publishing | 2.06 | 4 | Pharmaceutical | 1.67 | ||||
5 | Communications | 2.01 | 5 | Banking | 1.68 | ||||
Panel D. Industries that hire directors with experience in the same industry | |||||||||
Top | Industry | % of new directors | Bottom | Industry | % of new directors | ||||
1 | Pharmaceutical | 53.87% | 1 | Shipping containers | 0.00% | ||||
2 | Petroleum and natural gas | 44.03% | 2 | Textiles | 0.00% | ||||
3 | Trading | 42.80% | 3 | Beer and liquor | 0.93% | ||||
4 | Business services | 42.65% | 4 | Rubber and plastic | 2.46% | ||||
5 | Electronic equipment | 38.13% | 5 | Agriculture | 3.45% |
Variables | Definition | Source |
---|---|---|
IDD | Percentage of directors who have experience from more than one FF 48 industries prior to joining the current firm | BoardEx |
Same | Percentage of directors who have experience in the same FF 48 industry prior to joining the current firm | BoardEx |
Female | Percentage of female directors | BoardEx |
Tobin’s Q | Book value of assets less book value of equity plus market value of equity divided by total assets | Compustat |
TSR | Total shareholder return including dividend yield | CRSP |
ROE | Net income scaled by lagged total equity | Compustat |
Firm size | Log of total assets | Compustat |
Market leverage | Long-term and short-term debt scaled by total assets | Compustat |
ROA | Net income scaled by lagged total assets | Compustat |
Firm risk | Standard deviation of monthly stock return | CRSP |
Intangible asset | Intangible assets scaled by lagged total assets | Compustat |
Board size | Number of director in the board | BoardEx |
Independence | Ratio of independent directors in a board | BoardEx |
CEO ownership | Equity ownership held by CEO | BoardEx |
R&D | R&D expenditure scaled by lagged total assets. Missing value set as 0 | Compustat |
Capital expenditure | Capital expenditure scaled by total assets | Compustat |
Equity-based compensation | Restricted stock and stock option grants scaled by total compensation | ExecuComp |
Discretionary accrual | Residuals from modified Jones model | Compustat |
Variables | N | Mean | St. Dev. | 1Q | Median | 3Q |
---|---|---|---|---|---|---|
Key variables | ||||||
IDDt−1 | 28,752 | 0.51 | 0.249 | 0.333 | 0.5 | 0.7 |
Same industryt−1 | 28,752 | 0.161 | 0.194 | 0 | 0.1 | 0.25 |
Femalet−1 | 28,752 | 0.126 | 0.106 | 0 | 0.111 | 0.2 |
Performance variables | ||||||
Tobin’s Qt | 28,752 | 1.87 | 1.137 | 1.133 | 1.484 | 2.149 |
TSRt | 28,684 | 0.129 | 0.416 | −0.12 | 0.099 | 0.323 |
ROEt | 27,952 | 0.116 | 0.264 | 0.046 | 0.116 | 0.195 |
Firm characteristics | ||||||
Firm sizet−1 | 28,752 | 7.812 | 1.698 | 6.583 | 7.704 | 8.925 |
Market leveraget−1 | 28,752 | 0.161 | 0.151 | 0.036 | 0.126 | 0.246 |
ROAt−1 | 28,752 | 0.047 | 0.096 | 0.012 | 0.045 | 0.091 |
Firm riskt−1 | 28,752 | 0.104 | 0.06 | 0.062 | 0.088 | 0.127 |
Intangible assett−1 | 28,752 | 0.181 | 0.196 | 0.017 | 0.107 | 0.296 |
Governance characteristics | ||||||
Board sizet−1 | 28,752 | 9.382 | 2.431 | 8 | 9 | 11 |
Independencet−1 | 28,752 | 0.789 | 0.097 | 0.727 | 0.8 | 0.875 |
CEO Ownershipt−1 | 28,752 | 0.016 | 0.04 | 0 | 0.002 | 0.013 |
Other variables | ||||||
R&Dt | 28,752 | 0.027 | 0.054 | 0 | 0 | 0.028 |
Capital expendituret | 28,485 | 0.044 | 0.051 | 0.012 | 0.029 | 0.057 |
Equity-based compensationt | 28,124 | 0.515 | 0.345 | 0.313 | 0.527 | 0.687 |
Discretionary accrualt | 21,004 | 0.033 | 0.142 | −0.038 | 0.019 | 0.093 |
Dependent Variable: Tobin’s Q | ||||||
---|---|---|---|---|---|---|
(1) | (2) | (3) | (4) | (5) | (6) | |
IDDt−1 | −0.041 | 0.354 *** | 0.372 *** | 0.352 *** | ||
(0.068) | (0.064) | (0.064) | (0.064) | |||
Same industryt−1 | 0.242 *** | 0.216 ** | ||||
(0.085) | (0.085) | |||||
Femalest−1 | 0.231 * | 0.181 | ||||
(0.133) | (0.132) | |||||
Firm sizet−1 | −0.085 *** | −0.086 *** | −0.065 *** | −0.066 *** | −0.089 *** | |
(0.012) | (0.014) | (0.013) | (0.013) | (0.014) | ||
Market leveraget−1 | −1.750 *** (0.096) | −1.747 *** (0.096) | −1.762 *** (0.096) | −1.755 *** (0.096) | −1.744 *** (0.095) | |
ROAt−1 | 3.162 *** | 3.163 *** | 3.168 *** | 3.133 *** | 3.190 *** | |
(0.248) | (0.248) | (0.248) | (0.250) | (0.247) | ||
Firm riskt−1 | 0.507 *** | 0.505 *** | 0.518 *** | 0.552 *** | 0.478 ** | |
(0.193) | (0.193) | (0.195) | (0.195) | (0.193) | ||
Intangible assett−1 | −0.310 *** (0.085) | −0.309 *** (0.085) | −0.293 *** (0.086) | −0.292 *** (0.086) | −0.305 *** (0.085) | |
Board sizet−1 | 0.004 | 0.005 | 0.003 | 0.005 | ||
(0.006) | (0.006) | (0.006) | (0.006) | |||
Independencet−1 | −0.214 | −0.034 | −0.059 | −0.234 | ||
(0.143) | (0.144) | (0.143) | (0.143) | |||
CEO Ownershipst−1 | 0.002 | −0.151 | −0.171 | 0.062 | ||
(0.387) | (0.391) | (0.391) | (0.391) | |||
Constant | 1.891 *** | 2.493 *** | 2.616 *** | 2.460 *** | 2.512 *** | 2.606 *** |
(0.039) | (0.091) | (0.134) | (0.135) | (0.133) | (0.135) | |
Industry and year FE | Yes | Yes | Yes | Yes | Yes | Yes |
# of observations | 28,752 | 28,752 | 28,752 | 28,752 | 28,752 | 28,752 |
Adjusted R2 | 0.195 | 0.350 | 0.350 | 0.347 | 0.346 | 0.351 |
Dependent Variable | ||||||||
---|---|---|---|---|---|---|---|---|
TSR | ROE | |||||||
(1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) | |
IDDt−1 Same industryt−1 | 0.019 * (0.011) | −0.030 ** | 0.021 * (0.011) −0.032 ** | 0.044 *** (0.009) | −0.032 *** | 0.044 *** (0.009) −0.034 *** | ||
(0.013) | (0.014) | (0.011) | (0.011) | |||||
Femalet−1 | −0.008 | −0.015 | 0.073 *** | 0.062 *** | ||||
(0.024) | (0.024) | (0.020) | (0.020) | |||||
Constant | 0.175 *** | 0.172 *** | 0.168 *** | 0.178 *** | −0.015 | −0.027 | −0.022 | −0.004 |
(0.025) | (0.025) | (0.025) | (0.025) | (0.019) | (0.018) | (0.019) | (0.019) | |
Controls | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
Industry and year FE | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
# of observations | 28,684 | 28,684 | 28,684 | 28,684 | 27,952 | 27,952 | 27,952 | 27,952 |
Adjusted R2 | 0.197 | 0.197 | 0.197 | 0.197 | 0.261 | 0.260 | 0.260 | 0.261 |
Dependent Variable: Tobin’s Q | ||||||||
---|---|---|---|---|---|---|---|---|
Competitive | Unique | High Tech | New Economy | |||||
Yes (1) | No (2) | Yes (3) | No (4) | Yes (5) | No (6) | Yes (7) | No (8) | |
IDDt−1 | 0.354 *** | 0.332 *** | 0.357 *** | 0.330 *** | 0.251 | 0.355 *** | 0.037 | 0.385 *** |
(0.081) | (0.089) | (0.132) | (0.065) | (0.169) | (0.068) | (0.227) | (0.064) | |
Same industryt−1 | 0.320 *** | 0.092 | 0.588 *** | −0.073 | 0.328 * | 0.162 * | 0.657 *** | 0.070 |
(0.104) | (0.117) | (0.162) | (0.076) | (0.191) | (0.092) | (0.229) | (0.087) | |
Femalet−1 | 0.310 * | 0.039 | −0.050 | 0.293 ** | 0.186 | 0.190 | 0.696 | 0.110 |
(0.178) | (0.176) | (0.260) | (0.131) | (0.416) | (0.136) | (0.511) | (0.132) | |
Constant | 2.581 *** | 2.628 *** | 2.980 *** | 2.340 *** | 2.544 *** | 2.617 *** | 2.485 *** | 2.658 *** |
(0.166) | (0.190) | (0.238) | (0.158) | (0.366) | (0.145) | (0.478) | (0.135) | |
Controls | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
Industry and year FE | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
# of observations | 14,864 | 13,888 | 10,200 | 18,552 | 4725 | 24,027 | 3366 | 25,386 |
Adjusted R2 | 0.374 | 0.330 | 0.330 | 0.354 | 0.267 | 0.369 | 0.287 | 0.372 |
Dependent Variable: Tobin’s Q | ||||
---|---|---|---|---|
(1) | (2) | (3) | (4) | |
IDDt−1 | 0.278 *** | 0.248 *** | ||
(0.082) | (0.083) | |||
Same industryt−1 | 0.319 *** | 0.334 *** | ||
(0.113) | (0.114) | |||
Femalest−1 | 0.058 | 0.085 | ||
(0.175) | (0.177) | |||
IDDt−1 × Complexityt−1 | 0.223 *** | 0.245 *** | ||
(0.049) | (0.054) | |||
Same industryt−1 x Complexitt−1 | −0.226 *** | −0.273 *** | ||
(0.087) | (0.088) | |||
Femalet−1 x Complexityt−1 | 0.290 ** | 0.082 | ||
(0.132) | (0.140) | |||
Complexityt−1 | −0.323*** | −0.180 *** | −0.237 *** | −0.313 *** |
(0.030) | (0.023) | (0.024) | (0.031) | |
Constant | 2.455 *** | 2.210 *** | 2.314 *** | 2.424 *** |
(0.149) | (0.148) | (0.147) | (0.151) | |
Controls | Yes | Yes | Yes | Yes |
Industry and year FE | Yes | Yes | Yes | Yes |
# of observations | 26,594 | 26,594 | 26,594 | 26,594 |
Adjusted R2 | 0.342 | 0.339 | 0.337 | 0.345 |
1st Stage Dependent Variable: R&D, 2nd Stage Dependent Variable: Tobin’s Q | |||||||
---|---|---|---|---|---|---|---|
IDD | Same | Female | |||||
1st | 1st | 2nd | 1st | 2nd | 1st | 2nd | |
(1) | (2) | (3) | (4) | (5) | (6) | (7) | |
IDDt−1 | 0.011 *** (0.003) | ||||||
Same industryt−1 | 32.358 *** (5.604) | 0.040 *** | |||||
(0.005) | |||||||
6.049 *** | |||||||
Femalest−1 | (2.123) | 0.003 | |||||
(0.007) | |||||||
Constant | 0.053 *** | 0.057 *** | 2.486 *** | 0.049 *** | 2.486 *** | 0.053 *** | 88.529 * (50.994) 2.486 *** |
(0.006) | (0.006) | (0.132) | (0.006) | (0.134) | (0.006) | (0.133) | |
Controls | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
Industry and year FE | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
# of observations | 28,752 | 28,752 | 28,752 | 28,752 | 28,752 | 28,752 | 28,752 |
Adjusted R2 | 0.501 | 0.503 | 0.350 | 0.516 | 0.347 | 0.501 | 0.346 |
1st Stage Dependent Variable: Capex, 2nd Stage Dependent Variable: Tobin’s Q | |||||||
---|---|---|---|---|---|---|---|
IDD | Same | Female | |||||
1st | 1st | 2nd | 1st | 2nd | 1st | 2nd | |
(1) | (2) | (3) | (4) | (5) | (6) | (7) | |
IDDt−1 | −0.006 *** (0.003) | ||||||
∆CapexIDD Same industryt−1 | −62.175 *** (10.767) | 0.142 *** (0.003) | |||||
∆CapexSame Femalet−1 | −217.561 *** (76.341) | −0.000 (0.005) | |||||
∆CapexFemale Constant | 0.067 *** | 0.065 *** | 2.489 *** | 0.067 *** | 2.487 *** | 0.067 *** | −991.855 * (571.321) 2.486 *** |
(0.005) | (0.005) | (0.132) | (0.005) | (0.134) | (0.005) | (0.133) | |
Controls | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
Industry and year FE | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
# of observations | 28,485 | 28,485 | 28,485 | 28,485 | 28,485 | 28,485 | 28,752 |
Adjusted R2 | 0.466 | 0.467 | 0.350 | 0.466 | 0.347 | 0.466 | 0.346 |
1st Stage Dependent Variable: Equity, 2nd Stage Dependent Variable: Tobin’s Q | |||||||||
---|---|---|---|---|---|---|---|---|---|
IDD | Same | Female | |||||||
1st | 1st | 2nd | 1st | 2nd | 1st | 2nd | |||
(1) | (2) | (3) | (4) | (5) | (6) | (7) | |||
IDDt−1 | 0.130 *** (0.017) | ||||||||
∆EquityIDD Same industryt−1 | 2.870 *** (0.497) | 0.142*** (0.020) | |||||||
∆EquitySame Femalet−1 | 1.699 *** (0.596) | 0.032 (0.036) | |||||||
∆EquityFemale Constant | 0.026 | 0.072 ** | 2.485 *** | 0.010 | 2.487 *** | 0.030 | 7.295 * (4.202) 2.486 *** | ||
(0.034) | (0.033) | (0.132) | (0.033) | (0.134) | (0.033) | (0.133) | |||
Controls | Yes | Yes | Yes | Yes | Yes | Yes | Yes | ||
Industry and year FE | Yes | Yes | Yes | Yes | Yes | Yes | Yes | ||
# of observations | 28,124 | 28,124 | 28,752 | 28,124 | 28,752 | 28,124 | 28,752 | ||
Adjusted R2 | 0.132 | 0.138 | 0.350 | 0.137 | 0.347 | 0.132 | 0.346 |
1st Stage Dependent Variable: DA, 2nd Stage Dependent Variable: Tobin’s Q | |||||||||
---|---|---|---|---|---|---|---|---|---|
IDD | Same | Female | |||||||
1st | 1st | 2nd | 1st | 2nd | 1st | 2nd | |||
(1) | (2) | (3) | (4) | (5) | (6) | (7) | |||
IDDt−1 | −0.004 (0.017) | ||||||||
∆DASame Same industryt−1 | −83.889 *** (14.528) | −0.015 *** (0.006) | |||||||
∆DASame Femalet−1 | −15.993 *** (5.612) | 0.020 * (0.012) | |||||||
∆DAFemale Constant | 0.055 *** | 0.054 ** | 2.511*** | 0.057 *** | 2.489 *** | 0.057 | 11.832 * (6.815) 2.486 *** | ||
(0.010) | (0.010) | (0.132) | (0.010) | (0.134) | (0.010) | (0.133) | |||
Controls | Yes | Yes | Yes | Yes | Yes | Yes | Yes | ||
Industry and year FE | Yes | Yes | Yes | Yes | Yes | Yes | Yes | ||
# of observations | 20,849 | 20,849 | 28,752 | 28,752 | 28,752 | 28,849 | 28,752 | ||
Adjusted R2 | 0.073 | 0.073 | 0.350 | 0.073 | 0.347 | 0.073 | 0.346 |
Dependent Variable: | |||
---|---|---|---|
IDD, t | Tobin’s Q | ||
(1) | (2) | ||
County diversityt−1 | 0.696 *** | ||
(0.083) | |||
IDDt−1 | 1.517 *** | ||
(0.553) | |||
Same industryt−1 | 0.075 *** | 0.137 ** | |
(0.008) | (0.060) | ||
Femalet−1 | 0.200 *** | −0.033 | |
(0.015) | (0.129) | ||
Firm sizet−1 | 0.058 *** | −0.150 *** | |
(0.001) | (0.032) | ||
Market leveraget−1 | −0.031 *** (0.011) | −1.751 *** (0.048) | |
ROAt−1 | −0.048 *** | 3.222 *** | |
(0.016) | (0.124) | ||
Firm riskt−1 | 0.151 *** | 0.324 * | |
(0.029) | (0.170) | ||
Intangible assett−1 | 0.036 *** | −0.364 *** | |
(0.008) | (0.044) | ||
Board sizet−1 | −0.001 * | 0.004 | |
(0.001) | (0.003) | ||
Independencet−1 | 0.476 *** (0.015) | −0.764 *** (0.273) | |
CEO Ownershipt−1 | −0.488 *** | 0.569 * | |
(0.035) | (0.332) | ||
Constant | −1.058 *** | 3.490 *** | |
(0.074) | (0.283) | ||
Industry and year FE | Yes | Yes | |
# of observations | 25,520 | 25,520 | |
Adjusted R2 | 0.312 |
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Kim, D.S.; Sul, H.K. Diversity Matters: A Study on the Relationship between Board Career Diversity and Firm Performance. Sustainability 2021, 13, 9674. https://doi.org/10.3390/su13179674
Kim DS, Sul HK. Diversity Matters: A Study on the Relationship between Board Career Diversity and Firm Performance. Sustainability. 2021; 13(17):9674. https://doi.org/10.3390/su13179674
Chicago/Turabian StyleKim, Daniel Sungyeon, and Hong Kee Sul. 2021. "Diversity Matters: A Study on the Relationship between Board Career Diversity and Firm Performance" Sustainability 13, no. 17: 9674. https://doi.org/10.3390/su13179674