Board Diversity and Cost of Equity (CoE)

Abstract

We examine the effects of board diversity on corporate cost of equity (CoE). Using a composite index for diversity, we find that greater diversity leads to lower CoE. In further analysis, we report that this association is more prominent when the firm is experiencing lower internal (or external) monitoring or facing higher agency issues or suffering from greater financial constraints. Our results are robust to, e.g. propensity score matching; instrumental variable approach; use of alternate measures of CoE; use of additional (possibly influential omitted) variables, and various other sensitivity and endogeneity tests.