Ethnic diversity of the board and firm-specific information

Abstract

Many institutional investors expressed a preference for board diversity by increasing female and non-Caucasian directors on corporate boards (Bloxhan, 2016). In this study, I contribute to this line of literature by exploring the followings: 1) the correlation between ethnic diversity of corporate boards and firm-specific information; 2) the relationship between ethnic diversity of corporate boards, firms' characteristics and firm-specific information; and 3) the interrelation between ethnic diversity of corporate boards, institutional investors and firm-specific information. Firstly, I find that share prices of firms with ethnic-diversified boards reflect more firm-specific information after controlling for gender diversity and age diversity of corporate boards, corporate governance, institutional investors' ownership, accruals quality, merger and acquisition activities and several characteristics of firms like size, firm age, profitability, profit volatility, leverage and business diversification. Secondly, I split the sample and find that such relationship exists in the subsample of firms with merger activities / firms with high profit volatility / high growth firms / high leverage firms but not in the subsample of firms without merger activities / firms with low profit volatility / low growth firms / low leverage firms. High growth firms, firms with merger activities and firms with high profit volatility tend to be in businesses with more complexity and facing a fast changing environment. These firms may have a more complex structure and need experts with specialized skills. Non-Caucasians may have specialized skills or have higher education achievements in order to be board directors. An ethnic-diversified board of a firm implies better corporate governance. Boards with more valuable human resources may in turn provide better performance. I argue that firms that engage directors with specialized skills and firms with better corporate governance will lead to higher, stable cash flows and it is more likely that institutional investors tend to select those firms for long-term investments. Literature shows that long-term institutional investors are widely believed to intervene in the corporate governance of firms more intensively and reach target companies for governance issue (Carleton et al., 1998; Rose and Bielby, 2011). In this study, I find that the relative volume of trading by institutional investors are lower for firms with ethnic-diversified boards and it is more likely that institutional investors hold shares of these firms for long-term purposes. Moreover, I find that the firms with ethnic-diversified boards attract more institutional investors. Trading activities of these long-term investors lead to the transmission of firm-specific information into share prices.