Corporate Board Diversity and Firm Outcomes
Various aspects of corporate board diversity are explored in this research, highlighting the impact on ethical practices, innovation, financial performance, and disclosure of firm-specific information. The discussion delves into the advantages and disadvantages of board heterogeneity, the response of institutional investors to diversity, and the influence of factors like domicile location and business relationships on firm outcomes. Gaps in research objectives are identified, with a focus on the relationship between ethnic board diversity and earnings quality. The literature review examines the effects of policies such as Malaysia's New Economic Policy on ethnic board diversity.
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Presentation Transcript
BROWN BAG LUNCH SERIES 1 PRESENTER: TEE CHWEE MING DATE: 3rd. September 2019 Time: 10-11am Location: Conference Room A
PUBLICATION INDEX ISI Core Collection: (a)Social Science Citation Index [SSCI]: 10% (b)Emerging Sources Citation Index [ESCI]: 60%
CURRENT ISSUES Corporate board diversity: Ethnic and gender Enhances a firm s ethical practices, innovation, financial performance and public disclosure of firm-specific information (Carter et al., 2003, 2010; Erhardt et al., 2003; Horwitz and Horwitz, 2007; Miller and Triana, 2009)
CURRENT ISSUES On the other hand, heterogeneous boards may lead to divisiveness and conflicts, precipitating dysfunctional team interaction and poor financial performance (Hambrick et al., 1996; Horwitz and Horwitz, 2007; Carter et al., 2010)
CURRENT ISSUES Exponential increase in global corporate institutional ownership is highlighted in the literature (Khorana et al., 2005) Institutional investors should not be viewed as a homogeneous group
CURRENT ISSUES Various firm outcomes is influenced by factors such as domicile location(Ferreira and Matos, 2008; Aggarwal et al., 2011; Kim et al., 2016; Liu et al., 2018), business relationship (Almazan et al., 2005; Shin and Seo, 2011) and investment horizon (Liu et al., 2018).
GAPS/RESEARCH OBJECTIVES The relationship between ethnic board diversity and earnings quality of a firm not explored What s the response of institutional investors to ethnic board diversity? Are there any evidence of heterogeneity? Why?
LITERATURE REVIEW The New Economic Policy and its effect on ethnic board diversity: 30% quota Malaysia: Racially diverse set-up
H1: ETHNIC BOARD DIVERSITY AND EARNINGS QUALITY Agency theory: Independent and transparent decision- making in the boards Resource dependent theory: Offers a pool of talent Social psychology theory: Majority from same ethnic group have more power. Diversity discourage cronyism
H1: ETHNIC BOARD DIVERSITY AND EARNINGS QUALITY H1: Ethnically diverse boards are associated with higher earnings quality
H2: INSTITUTIONAL INVESTORS MONITORING ROLE The monitoring role of institutional investors (II) The accuracy of financial statements is important to II because they rely on it to evaluate the firm s performance and asset allocation II can detect practices of earnings management
H2: INSTITUTIONAL INVESTORS MONITORING ROLE Recent anecdotal evidence suggests that institutional investors explicitly tie board diversity (i.e. ethnic, gender and experience) to board monitoring and firm performance H2: The association between ethnic board diversity and higher earnings quality is strengthened by institutional investors ownership.
H3: INSTITUTIONAL INVESTORS DOMICILES AND MONITORING ROLE The geographical proximity theory argues that domestic institutional investors have unparalleled advantage in monitoring Their proximity to the firm s locality allows domestic institutional investors to obtain detailed information about a firm s technical operations and management culture
H3: INSTITUTIONAL INVESTORS DOMICILES AND MONITORING ROLE Firm-specific information is also obtained at lower costs, resulting in substantial comparative advantage over foreign institutional investors We argue that domestic institutional investors are inclined to support ethnic diversity in Malaysian corporate boards
H3: INSTITUTIONAL INVESTORS DOMICILES AND MONITORING ROLE H3: The association between ethnic board diversity and higher earnings quality is strengthened by domestic institutional investors ownership.
THE INFLUENCE OF POLITICAL CONNECTIONS Political connected firms (PCFs) plagued severe agency problems. Receive political protection from the top politicians e.g. 1MDB However, PCFs can also be efficient and transparent in the long run i.e., YTL, Sunway etc.
THE INFLUENCE OF POLITICAL CONNECTIONS H4: Political connection has no significant effect on the association between ethnically diverse boards and higher earnings quality.
RESEARCH METHODS DATA: 2002-2012 of all Malaysia 770 PLCs Annual reports: Hand collected data Financial variables: Bureau Van Djik (BVD) database
EXPERIMENTAL VARIABLES Earnings quality: Variability in accruals (Chaney et al., 2011) Ethnic board diversity: BLAU index 0<x<1 Institutional investors: Percentage of shareholding PCF: Dummy variable (Faccio, 2006; Gomez and Jomo, 1999; Gul, 2006)
SUMMARY Ethnic board diversity promotes higher earnings quality Institutional investors prefer ethic board diversity Domestic institutional investors Political connections attenuates higher earnings quality
