Board diversity and stock price crash risk: exacerbate or mitigate

Abstract

As China is the largest emerging capital market, stock price crash risk (SPCR) due to corporate governance failures is a frequent phenomenon. The board of directors stands as the cornerstone of corporate governance, wielding a substantial influence on the SPCR. The influence of board diversity (BD) on SPCR remains a topic rife with unanswered questions. To fill this gap, we construct a multidimensional index system to capture BD and examine its impact on the SPCR based on companies listed on the Chinese A-share market from 2010 to 2020. Our findings show that BD mitigates SPCR rather than exacerbates it. The foundational findings remain intact even after addressing issues of endogeneity and executing thorough validity tests. We further identify four mechanisms to lower SPCR through influencing board monitoring, including reducing agency costs, alleviating inefficient investments, improving information disclosure, and appointing diverse executives. Overall, our research underscores the pivotal importance of BD within the capital market and provides new insights into the mitigation mechanisms of the SPCR.