Board diversity and investment efficiency: evidence from China

Author:Irfan Ullah, Aurang Zeb, Muhammad Arif Khan, Wu Xiao
Publication Date:27 Jul 2020
Board diversity and investment
efciency: evidence from China
Irfan Ullah, Aurang Zeb, Muhammad Arif Khan and Wu Xiao
Purpose The purpose of thisstudy is to investigate the relationship betweenboard diversity measured
as relation-oriented,task-oriented andboard overall diversity and firm’sinvestment efficiency.
Design/methodology/approach This study estimates four dimensions of board diversity, including
age, gender, tenure and education. The four dimensions are further categorized in relation-oriented
diversity (i.e. age and gender), task-oriented diversity (i.e. tenure and education) and overall board
diversity (relation and task oriented). Panel data analysis is used to examine the
board diversityinvestment efficiency relationship in Chinese listed firms during the years 20032018.
The findingsof the study are robust to a battery of econometric techniques.
Findings This study finds relation-oriented, task-oriented and overall diversity of a board curb
investment inefficiency by discouraging sub-optimal investment (over- or under-investment). In other
words,board diversity improves firms’ investmentefficiency.
Practical implications The results suggest that board diversity plays a significant role in corporate
decisions. The findings illustrate that board diversity disciplines the management, reduces agency
conflictsand thereby improves corporategovernance, resulting in higherinvestment efficiency.
Originality/value This study has two important contributions. First, this study extends the prior
literatureof investment efficiency by consideringsocio-psychological dimensionof the board diversity by
constructing relation-and task-oriented diversity. Second, contraryto earlier studies on board diversity,
this study takes four facets of board diversity, i.e. age, gender, education and tenure that improve
corporategovernance mechanism.
Keywords China, Investment efficiency, Board diversity, Task-oriented diversity,
Overall board diversity, Relation-oriented diversity
Paper type Research paper
1. Introduction
Corporate investments decisions determine a firm’s market position as it ensures
sustainable development, on the one side, while the value for shareholders on the other.
Managers must make risky decisions to run businesses. Good managers efficiently invest
the firm’s economic resources by curtailing over- and/or under-investments [1]. Various
factors influence investment decisions such as economic conditions, monetary and fiscal
policies, capital market and firms’ operations (Richardson, 2006). Managerial personal
characteristics such as overconfidence and irrationality also matter a lot, especially when a
firm exists in an inefficient market and has a poor governance record (Malmendier et al.,
2011). Traditional theorists such as Miller (1977),Myers (1984) and Myers and Majluf (1984)
emphasize market-, industry- and firm-related attributes that affect a firm’s strategic
investment choices. However, decision-making as a function of corporate board will also be
influenced by the personal characteristics of its members. Therefore, agencyproblems with
information asymmetries and board members’ personal attributes affect firm’s
performances. Earlier researchers documented several characteristics of decision-makers’
personality that affect their decisions. However, their findings are inconclusive. Moreover,
Irfan Ullah is based at the
School of Accounting,
Dongbei University of
Finance and Economics,
Dalian, China.
Aurang Zeb is based at the
Quaid-e-Azam College of
Commerce, University of
Peshawar, Peshawar,
Muhammad Arif Khan is
based at the School of
Economics and
Management, Dalian
University of Technology,
Dalian, China. Wu Xiao is
based at the School of
Finance, Dongbei
University of Finance and
Economics, Dalian, China.
Received 2 January 2020
Revised 7 May 2020
21 June 2020
Accepted 1 July 2020
DOI 10.1108/CG-01-2020-0001 VOL. 20 NO. 6 2020, pp. 1105-1134, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 1105
strategic decisions are the prerogative of boards in corporate settings.Therefore, impact of
board diversity on investment efficiency is imperative to be investigated particularly in a
country characterized as a “double track system” such as China. This study aims to fill the
gap by investigating the impact of corporateboard diversity on investment efficiency.
In this era of globalization and demographic change, organizations rely heavily on team’s
performance to meet their operational and strategic goals (Kozlowski and Bell, 2003).
Likewise, these forces are also fueling the transformation of workforce with work groups
becoming more diverse (Bell, 2011). As a result, team diversity in modern corporate setups
attracted the attention of researchers and regulators. In fact, diversity may be an asset
being an informational source for the business or a liability being a root cause of
interpersonal and intergroup biasness (Van Knippenberg et al.,2004). Researchers in the
past few years extensively studied board diversity attributes such as gender, age and
directors’ tenure at the board levels; however,their results are inconclusive. Moreover, most
of these studies analyzed very narrow facet of board diversity. For instance, Isidro and
Sobral (2015),Low et al. (2015),Lu
¨ckerath-Rovers (2013) and Mirza et al. (2019) studied
gender; Dagsson and Larsson (2011) and Liu and Sun (2010)investigated board members’
age and Livnat et al. (2019) examined members’ tenure at the boardroom effect only.
Therefore, results obtained from these studies reflect very narrow facet of board diversity
and do not consider the multi-facetnature of board diversity.
Considering the four aspects of board diversity, we investigated the relationship between
board diversity and investment efficiency. We grouped these four attributes of diversity into
relation-oriented and task-oriented categories. Relation-oriented diversity considers
surface-level diversity which includes gender and age, whereas task-oriented is job-related
attributes which consist of tenure and education. We postulate that board relation-oriented
diversity positively contributes toward firm’s investment efficiency. This association is first
because of presence of female members on board room. Extant literature shows that
female directors are more conservative and risk-averse as compared to their male
counterparts (Hurley and Choudhary, 2020;Khaw et al., 2016). Thus, female members are
also more sensitive toward potential reputation risk (Chen et al.,2017). Consequently,
female-dominated boards are relatively less engaged in earnings manipulation practices
(Kyaw et al.,2015), window dressing (Wahid, 2019) and financial frauds (Habib et al.,
2018). Second, board members’ age, i.e. a relation-oriented variable, also affects firm’s
performance. However, the literature is inconclusive. For instance, Huang et al. (2012)
found that CEO’s age is positively associated with financial reporting quality, whereas Zhou
and Wang (2014) reported negative relationship with risk-taking ability. Similarly, younger
CEOs are more vulnerable to stock price crashes (Andreou et al.,2017). However,
presence of diverse age members at the board level lead to variation in perspectives
because each member belongs to different generation and is unique to their worldview,
experience and values and thus enable board to take different perspectives into account
before taking a decision. This helps the board to take appropriate decision. In short, extant
literature (Abad et al.,2017;Andreou et al., 2017;Bernile et al., 2018;Jin et al.,2014;Kyaw
et al., 2015;Wahid, 2019;Wicaksana et al.,2017) report that board members’ gender and
age influence investment choices, information asymmetry, earning management, risk taking
and financial reporting quality. Therefore, it will be quite difficult for a gender and age
diverse board to make consensus on a policy matter or strategic choice unless it is most
suitable and convincing. Thus, we assume that board relation-oriented diversity will
positively contributeto firms’ investment efficiency.
Similarly, we predict that board task-oriented diversity improves strategic decision-making
and thus enhances firms’ investment efficiency. Task-oriented attributes such as expertise
and tenure are more directly associated with the problem-solving and information-
processing functions. For instance, Li and Wahid (2018) and Livnat et al. (2019) reported
that senior directors are better able to perform boards’ monitoring and advising functions.

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