Board Diversity and Corporate Investment Monitoring

Abstract

This study examines the association between board diversity, measured in both relation-oriented dimension (i.e., gender, race, and age) and task-oriented dimension (i.e., tenure and expertise), and board performance in corporate investment monitoring. We assess sub-optimal investment by measuring how much firms deviate from the expected level of capital expenditures, R&D expenses, and acquisition spending within their industry. Using a sample of 15,125 firm-year across 1,898 firms from 1998 to 2014, we find that task-oriented diversity attributes, such as tenure and expertise, are negatively associated with sub-optimal investment, suggesting that diverse boards in terms of firm specific experience and functional expertise are more effective in overseeing corporate investment activities than homogeneous boards. Our results shed light on the recent regulatory requirements on board diversity and recommend greater task-oriented diversity in corporate boardrooms.