The Impact of Board Diversity on Boards' Monitoring Intensity and Firm Performance: Evidence from the Istanbul Stock Exchange

The main objective of this paper is to investigate the impact of board diversity on the financial performance of the ISE-100 index firms traded in the Istanbul Stock Exchange (ISE). We use gender and generation differences as observable attributes and directors’ educational and nationality backgrounds as proxies of non-observable attributes of values, beliefs, skills and competencies. We combine these different diversity indicators with "independence" through a diversity index, to account for the critical mass of diverse opinions needed for critical inquiry. We use market-to-book ratio and Tobin’s Q as our market based and return on equity as our accounting based measures of performance. Second, to understand the process by which board diversity affects firm performance, we focus on the relationship between board diversity and the board’s monitoring intensity, on the one hand, and monitoring intensity and firm performance, on the other. We define a board’s monitoring intensity as a composite mediating variable consisting of the number of board meetings, the number of board committees, auditing and financial reporting quality of the firm and its disclosure intensity. We find a positive relationship between board diversity and performance and board diversity and board monitoring intensity. Furthermore, not only does monitoring intensity impact performance, but it also decreases the explanatory power of most of our board diversity measures when it enters the model in the diversity-performance estimations. Overall, our results suggest that diverse boards are better monitors, mitigating agency conflict and enhancing firm performance. We expect that the findings would be of interest for researchers, investors, shareholders, boards, and regulators.