AAA Spark Meeting of the Regions

Board Skill Diversity and Firm Risk

• In Event: Gender and Diversity Issues

Abstract

This study examines whether board skill diversity is associated with firm risk. Using skill-related keywords in director biographies disclosed in firms’ proxy statements as measures of skill diversity, we find that board skill diversity reduces firms’ idiosyncratic risk. Specifically, board skill diversity reduces idiosyncratic risk by monitoring CEO power and advising on investment policy. We further show that having more female directors, measured by the exogenous Nasdaq’s diversity rule, increases board skill diversity. In addition, the association between board skill diversity and firm risk is mitigated when directors hold multiple outside board seats. Overall, this study identifies an important yet unrecognized board diversity dimension—director skills and qualifications at the acquired level and provides the first findings on how the role of board skill diversity shapes firms’ risk environment.

Authors

• Yanru Chang, Baruch College–CUNY

• Seungjoon Oh, Peking University