The impact of cultural diversity in corporate boards on firm performance |
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| Institution: | 1. Bank of Sharjah Chair, American University of Sharjah, United Arab Emirates,;2. School of Accounting and Finance, The Hong Kong Polytechnic University, Hong Kong;1. Campus Saint-Jean, University of Alberta, Edmonton, AB T6C 4G9, Canada;2. Nottingham University Business School (NUBS) China, 199 Taikangdong Road, Ningbo, Zhejiang 315100, China;1. College of Business Administration, University of Texas at El Paso, El Paso, TX, USA;2. Paul College of Business and Economics, University of New Hampshire, Durham, NH, USA;3. School of Business, Villanova University, Villanova, PA, USA |
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| Abstract: | We examine the impact of cultural diversity in boards of directors on firm performance. We construct a measure of national cultural diversity by calculating the average of cultural distances between board members using Hofstede's culture framework. Our findings indicate that national cultural diversity in boards negatively affects firm performance measured by Tobin's Q and ROA. These results hold after controlling for potential endogeneity using firm fixed effects and instrumental variables regressions. Further, the results are robust to controlling for a wide range of board and firm characteristics, including various measures of “foreignness” of the firm, alternative culture frameworks, and other measures of culture. The negative impact of cultural diversity on performance is mitigated by the complexity of the firm and the size of foreign sales and operations. In addition, we find that the negative effects of cultural diversity are concentrated among the independent directors. Finally, we find that not all aspects of cultural differences are equally important and that it is mainly the diversity in individualism and masculinity that affects the effectiveness of boards of directors. |
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