Working Paper: CEPR ID: DP15165
Authors: Alexander Ljungqvist; Konrad Raff
Abstract: We ask when and how a diverse board can benefit shareholders. Board diversity may be value-increasing even if some directors have agendas that are not perfectly aligned with shareholders’ interests. Diversity commits the board to a high information standard because directors with opposing agendas are deadlocked unless they have persuasive information in support of the optimal course of action. Since deadlock is costly, diversity strengthens directors’ incentives to gather information ex ante, which raises expected firm value. Diversity is more likely desirable if the firm's information environment is poor and if directors' opposing agendas are accompanied by sufficiently strong incentives for value maximization. However, if directors cannot credibly communicate their information, a homogeneous board dominates a diverse board.
Keywords: boards of directors; diversity; monitoring; deadlock
JEL Codes: G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| board diversity (G34) | expected firm value (G32) |
| opposing biases (D91) | strategic deadlock (D74) |
| strategic deadlock (D74) | persuasive information gathering (D80) |
| persuasive information gathering (D80) | expected firm value (G32) |
| board diversity (G34) | information gathering incentives (D82) |
| inability to communicate information (D83) | diminished benefits of diversity (J79) |
| homogeneous board dominates (C72) | expected firm value (G32) |