Does board diversity in industry-experience boost firm value? The role of corporate innovation

Peng Huang, Yue Lu and Ji Wu

Economic Modelling, 2023, vol. 128, issue C

Abstract: Previous studies examining board diversity disproportionately focus on directors' demographic features. In this paper, we construct a sophisticated measure of board diversity based on directors' industry-experience diversity (BIED) and examine its effect on firm value. Using a sample of S&P1500 firms, we find that higher BIED leads to higher firm value. This result survives both firm fixed effects and an instrumental variable approach, at least partially suggesting a causal relationship. We argue that a more diverse board brings more perspectives, viewpoints, knowledge and information to the firm, enhances directors’ capability of advising, and thus creates higher firm value. We further find one possible underlying economic mechanism through which BIED facilitates value creation. That is, BIED creates value by promoting corporate innovation. Overall, BIED constitutes a valuable corporate governance mechanism.

Keywords: Corporate boards of directors; Industry-experience diversity; Firm value; Corporate innovation (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:128:y:2023:i:c:s0264999323003164

DOI: 10.1016/j.econmod.2023.106504

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