Does a diverse board matter? A mediation analysis of board racial diversity and firm performance

Abstract

Purpose

This paper aims to reexamine the link between board racial diversity and firm performance. It focuses on the mechanism through which board racial diversity could affect performance. The paper proposes and empirically tests the role of employee productivity and R&D productivity in the relationship between board racial diversity and firm financial performance.

Design/methodology/approach

The paper adopts a mediation analysis framework with the bootstrapping method to test both the direct and indirect effect of board diversity on firm performance. The data used in the study come from S&P 1500 with variables composed from COMPUSTAT, Institutional Shareholder Services and Wharton Research Data Services.

Findings

Contrary to prior findings, the results indicate that there is neither direct effect of board racial diversity on firm performance nor is there an indirect effect through either employee productivity or R&D productivity.

Research limitations/implications

Because the data used in the paper are based on large public firms, the results may not generalize to small or private firms.

Practical implications

The findings of the paper suggest that not all diversity measures matter in the same way and firms should carefully make board appointments to reduce the perception that they select directors for any reason other than qualifications.

Originality/value

The paper advances the literature on board diversity by examining two previously unexplored mediating variables of employee productivity and R&D productivity. It also uses more rigorous mediation analysis with bootstrapping method and a validation sample to improve robustness of the results.

Citation

Vairavan, A. and Zhang, G.P. (2020), "Does a diverse board matter? A mediation analysis of board racial diversity and firm performance", Corporate Governance, Vol. 20 No. 7, pp. 1223-1241. https://doi.org/10.1108/CG-02-2020-0081