Corporate boards' political ideology diversity and firm performance |
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| Institution: | 1. Department of Finance, College of Business, BSN 3403, University of South Florida, Tampa, FL 33620, United States;2. Department of Finance, College of Business, 303 Lowder Hall, Auburn University, Auburn, AL 36849, United States;1. Ivey Business School, University of Western Ontario, 1255 Western Road – Room 3322, London, Ontario N6G 0N1, Canada;2. Rowe School of Business, Dalhousie University, Room 4090, 6100 University Avenue, Halifax, Nova Scotia B3H 4R2, Canada;3. School of Business, Fudan University, 7th Floor, Li Dasan Building, 670 Guoshun Road, Yangpu District, Shanghai, China;1. Chinese Academy of Finance and Development, Central University of Finance and Economics, 39 South College Rd, Haidian, Beijing 100081, China;2. Department of Finance, Cleveland State University, United States;1. Bentley College, Department of Finance, Waltham, MA 02452, United States;2. Bentley College, Department of Accounting, Waltham, MA 02452, United States |
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| Abstract: | We investigate whether diversity in points of view within corporate boards, as captured by the diversity in political ideology of board members, can affect a firm's performance. We employ personal political contributions' data to measure political ideology distance among groups of inside, outside directors and the CEO. Our empirical evidence strongly supports the notion that outside directors' monitoring effectiveness is more likely to be enhanced when their viewpoints are distinct from those of management. We find that ideologically diverse boards are associated with better firm performance, lower agency costs and less insiders' discretionary power over the firm's Political Action Committee (PAC) spending. Taken together, our results lead us to conclude that multiplicity of standpoints in corporate boardrooms is imperative for board effectiveness. |
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