Board Diversity and Corporate Investment Decisions: Evidence from China

Abstract

We investigate the relation between board diversity and corporate investment decisions. We select four diversity attributes namely, gender, age, tenure, and education diversity to find its impact of corporate investment. Further, we classify these four diversity attributes into surface-level and deep-level diversity to check its impact on investment. Analyzing Chinese non-financial firms over the period of 2003 to 2017, we employ fixed effect regression to test the formulated hypotheses. We deal with the endogeneity concerns and employ several robustness tests. We find that board gender, tenure, and education diversity reduce corporate investment level. Further, we find that gender and age diversity are negatively associated with sensitivity of investment to growth opportunities, while tenure and education diversity are positively related to investment-Q sensitivity. We find that surface-level diversity reduces the sensitivity of investment to growth opportunities, while deep-level diversity positively affects investment-Q sensitivity. Overall, our findings suggest that board’s surface-level diversity is associated with inefficient investment policies, while deep-level diversity improve the corporate investment decisions. This study shows that board diversity play a decisive role in corporate investment decisions. Policies should be devised to mitigate the negative role of surface-level diversity. Furthermore, as deep-level diversity improves investment decisions, organizations and policy-makers should encourage it in order to get benefits of a diverse board. Majority of prior studies consider one dimension of diversity, such as gender, to test its impact on investment decisions. This study shows how surface-level diversity attributes (low job related) and deep-level diversity attributes (highly job related) affect board decisions. This study comprehensively analyzes the impact of board diversity on corporate investment decisions in an emerging economy.