Does Board Diversity Mitigate Risk? The Effect of Homophily and Social Ties on Risk-Taking in Financial Institutions

Alzayed, Noora; Batiz-Lazo, Bernardo; Eskandari, Rasol

Abstract

Research Question/Issue This study investigates whether greater board diversity and looser social network ties have an impact on board independence and risk-taking in US financial institutions from 2010 to 2022.The econometric strategy involved structural equation models, where risk as a dependent variable was measured by two latent variables and a total of five measures of risk. Several aspects of board diversity were utilized including gender, social, experience and educational backgrounds. Research Findings/Insights The findings suggested that diversity in nationality had a significant positive effect, while age and gender diversity had a minor effect on mitigating risk. Two measures of educational diversity had mixed results while suggesting that financial education is associated with greater risk. Also, social networks had a significant effect on risk-taking, especially on market risk. Theoretical/Academic Implications The study highlights the importance of maintaining a sensible level of board diversity across all aspects to avoid issues of cohesion and poor communication. This implication arises from the conclusion that too diverse a board might suffer from the lack of cohesion and communication, while a board with very low diversity will not be able to benefit from diverse backgrounds and expertise. Practitioner/Policy Implications Results from this study recommend incorporating social networking requirements in defining the independence of directors.

• Journal Article Type: Article
• Acceptance Date: Mar 1, 2024
• Online Publication Date: Mar 25, 2024
• Publication Date: 2024-06
• Deposit Date: Mar 13, 2024
• Publicly Available Date: Mar 26, 2027
• Journal: Research in International Business and Finance
• Print ISSN: 0275-5319
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 70
• Issue: A
• Pages: 102306
• DOI: https://doi.org/10.1016/j.ribaf.2024.102306
• Keywords: Finance; Business, Management and Accounting (miscellaneous)