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Promoter Homophily in Boards: Does it Really Matter? - An Analysis of Indian Firms

Shreya Biswas

Economics Bulletin, 2016, vol. 36, issue 1, 237-252

Abstract: The phenomenon of homophily which suggests that people tend to associate with others having similar traits is observed in many relations including marriage, friendship, work relations, etc. In this paper we provide evidence of homophily in Indian boards with respect to the linguistic affiliation of the promoter. A homophilous board is in effect a less linguistically diverse board. Homophily can lead to fall in diverse perspectives, weak governance and higher risk of decision errors. At the same time homophily also improves communication and coordination among the members of the board and the promoter leading to smooth board functioning. We find that promoter homophily in board is negatively associated with financial performance of firms indicating that the negative channels dominates the positive effects for firms in India. Further, the relation is stronger for the standalone firms vis-a-vis the groups firms suggesting that in emerging market economies the group firms having established reputation and connection with other group firms can partially offset the negative effects of homophily in board. The findings are in support of the research emphasizing the need of board diversity across various dimensions.

Keywords: Board of directors; homophily; firm performance (search for similar items in EconPapers)
JEL-codes: G3 L2 (search for similar items in EconPapers)
Date: 2016-02-12
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