Board diversity and investment efficiency: evidence from China

• Published date: 27 July 2020
• Date: 27 July 2020
• DOI: https://doi.org/10.1108/CG-01-2020-0001
• Pages: 1105-1134
• Author: Irfan Ullah,Aurang Zeb,Muhammad Arif Khan,Wu Xiao
• Subject Matter: Strategy,Corporate governance

Board diversity and investment

efficiency: evidence from China

Irfan Ullah, Aurang Zeb, Muhammad Arif Khan and Wu Xiao

Abstract

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 diversity–investment efficiency relationship in Chinese listed firms during the years 2003–2018.

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,

Pakistan.

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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