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Master thesis June 8, 2018
Faculty of Economics and Business
University of Groningen
Board diversity and bank performance
Student number: S 3327620
Name: Xiaoya Jin
Study Programme: MSc IFM
Supervisor: Dr. Martien Lamers
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Abstract
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1 Introduction
This research examines the impact of gender diversity, national diversity and age diversity
on bank performance. In addition, this research goes beyond by examining the moderating ef-fect of institutional differences among countries on the efef-fects of gender, national and age di-versity on bank performance.
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nationality and age) which have conflict empirical study results. In the following section, I present arguments for how the three factors influence firm performance.
This research has some contributions for further study. First, while most previous studies focus on one dimension of diversity, in this study, the effects of gender, nationality and age diversity on bank performance is investigated. A second contribution is that I perform an inter-national analysis and examine the moderating effect of legal and institutional environment fac-tors on the main relationship, which is not common in literature.
This research uses a sample of 1104 banks in 74 countries over the period 2009 to 2017. I use the panel data model to assess the relationship between board diversity and bank perfor-mance, with the possible moderating effect of investor protection and bank regulation.
To this end, this study provides insights on policy and regulation making. For example, the European Commission prefers a binding quota to increase the number of women directors in the boards. Thus it would be helpful to know the link between gender diversity and financial outcomes. Besides that, it is useful for regulators to know how the bank regulation moderate the link between board diversity and performance.
The structure of the paper is as follows. The chapter 2 reviews the previous literature and states my hypotheses about the influence of board diversity on bank performance. The chapter 3 describes the usage of the methodology. The chapter 4 presents the empirical results, and the last section provides the conclusion. Finally, references are given in the last part.
2 Background and hypotheses development
2.1 Theoretical perspective on board diversity and performance
Board of directors is the governing body of a company. There are many studies analyze how the upper echelons are formally defined and expected to operate, also, who the member of the upper echelons of a company are. Also, there are various theoretical perspectives focus on the relationship between board diversity and firm performance, This part discusses these different perspectives because they help to framework and understand the association between board diversity and firm performance.
2.1.1 Agency theory
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of interests between agent and principle (Fama,1980). Conflicts among shareholders, manage-ment and debt-holders and firms cause agency costs, so relevant governance mechanisms are necessary to monitor effectively and eliminate such conflicts (Fama and Jensen, 1983). Estab-lish board is one of the measures that principal take to avoid from agency problems, the role of boards is to eliminate agency conflicts by setting compensation and monitoring managers such as firing and hiring managers for the sake of shareholders’ best interests. According to agency theory, board functions are heavily dependent. Acting as a governance mechanism, board inde-pendence is significant because the board may have incentives to serve their personal profits rather than protect shareholders’ interests (Fama, 1980; Shleifer and Vishny, 1997). One argu-ment is a more diverse board would bring more board independence; this is consistent with the notion that directors with different gender, ethnicity or age may come up with more active ideas then a homogeneous group does (Carter et al., 2003). Outside director could be considered the ultimate outsider, the mutual monitoring among these directors help to enhance independence and we could also expect that it would bring better access to relevant information, leading to a more activist board. Diversity in boards can bring more ultimate outsiders ( Kandel & Lazear, 1992), thus diverse directors could lead to better corporate governance and ultimately influence firm performance.
However, a different perspective is that the board diversity might not enhance monitoring, Carter et al. (2003) argue that diverse board members are likely to be marginalized and their influence on decision making are thus very small. Additionally, some empirical studies find that more diversity in board is correlated to a poorer financial outcomes (Ferreira, 2010; Mueller, 2003). More diversity in board increase agency cost in some circumstances. Agency costs are related to turnover and sometimes occur when foreign or female directors are dissatisfied with their careers. Firms have to make a trade-off in this case, while the agency costs due to diversity could outweigh the benefit. Also, diversity in boards could hinder efficient decision-making. A heterogeneous group may cost more time in decision-making process,there is similar findings, for example,Elron (1997) states group cohesion always increases firm value, while their find-ings show the member diversity does not correlate with group cohesion. Since whether board diversity would improve board independence is an open question, and board independence is critical for a board to protect shareholder’s interests (Adams et al., 2010), we could say agency theory fails to clearly explain the role diversity plays in firm performance.
2.1.2 Other theories
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& Salacik, 1978), and every director in the board is accountable to create resources for the firm. In this scenario, board of directors is a key factor to reduce dependencies, because it acts as a communication channel with the external environment. The board provides advice and counsel as well as legitimacy (Pfeffer & Salacik, 1978). Based on this view, diversity is a key factor that affects firm performance because diverse directors could expand the board member net-works and contacts, which lead to more resources creation. Different directors use their unique social tie to develop the relationship with external entities and enhance firm reputation, direc-tors of different age, gender and ethnicity could expand the board networks which lead firms a better access to capital and funds. For instance, board members with good political connections might be helpful to tackle regulation relevant issues. In addition, the presence of minorities and women in boards are perceived in the interests of stakeholders, which gain the respect of the public and enhance firm reputation. According to Mishra & Jhunjhunwala (2013), diversity of boards increase the talent pool, they also found a heterogeneous board enables banks to meet the challenge and understand marketplace better. The similar finding also shows the age diver-sity in boards help firms to deal with regulators and gain more capital (Macey & O'hara, 2003). However, board diversity does not reasonably increase directors’ incentives to build more rep-utations as expert monitors (Carter et al. 2003).
Human capital theory has a similar perspective over this issue, suggesting directors with dif-ferent characteristics such as education discipline, functional background and industry experi-ence could provide diverse human capital to boardroom, ultimately improve firm performance (Fang et al., 2012). Specifically, in an age-diverse board, older directors might be more knowl-edgeable and experienced, while the younger may be more tend to adventures and innovations because younger directors are more energetic (Mishra & Jhunjhunwala 2013). Therefore, a di-verse board is expected to further firms’ understanding of current market as well as industry dynamics, leading to better performance. However, some empirical study results do not suggest human capital theory. Adams and Mehran (2012) find no correlation exists between board size as well as diversity of bank boards and a higher resourced board of directors.
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making process and enhance firm performance (Westphal and Milton, 2000). While some em-pirical study finds that gender diversity results in more critical thinking process which is time-consuming and observe board diversity has a “double-edged sword” effect on firm performance (Carter et al., 2010).
To make diversity work, the cohesion in boards is very important, board members need to learn respect each other and work together, only when the conflicts minimized, diverse board could benefit most from multiple perspectives and skills. However, friction and communication bottlenecks always develop in the diverse boards (Mishra & Jhunjhunwala 2013), new members and directors who are demographically different from other directors are perceived as “outsid-ers” (Byrne, 1971), these outsiders might be considered as a threat and difficult to gain trust (Carter et al. 2010). As a result, homogeneous groups outperform heterogeneous groups, Baranchuk and Dybvig (2009)’s finding shows a new director with important information could be more valuable in a less diverse board. Similar findings such as Mueller (2003) also observe a higher diversity leads to a negative outcome. Since theoretical frameworks do not provide a clear prediction of this issue, the effects of board diversity on firm performance becomes an empirical question. Next, I discuss several specific aspects of board diversity and their relation-ship with firm performance that lead to the hypotheses in this study.
2.2 Gender diversity and bank performance
Gender diversity is an important dimension of board diversity; it has received increasing attention in both popular press and academic area. Surveys show men still dominate boards, with nearly a half of firms still maintain an all-male board (Mishra & Jhunjhunwala 2013), boards are widely perceived as “boy’s club”. There are many reasons leading to that fact, the top one is prejudgment against women. Also, women face the invisible barrier in the path of climbing the corporate ladder named “glass ceiling effect”, this effect indicates the bias against
the female is greater in the higher level. However, gender diversity in boards has been given increasing attention by policymakers in many countries, some offer guidelines for gender di-versity while some establish gender quotas for firms. Gender quotas have two types. The first is the binding quota regulation which mandate firms to comply with relevant legislation, the second is soft quota regulation which acts as good corporate governance guidelines.
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to they are more intuitive and good at multitasking, while men are more tend to task-focused and be more analytical. The difference between men and women make they are both need in boardrooms to enhance dynamic. Second, women are playing a more significant role in econ-omy, for instance, more than a half purchase in Europe is made by women (Farrell and Hersch, 2001), which indicates female could better understand customers. Thus we could expect the board with female directors are more likely to make customer-friendly decisions, ultimately gain more market share and better financial outcomes. Third, from stakeholder theory’s per-spective, adding female directors in boards is one way that firms do stakeholder management. Gender diversity in boards enhance firm reputation because females are believed to be better in monitoring, they are not one part of “old boys” so they could be more independent.
The relationship between gender diversity and firm performance has been empirically
exam-ined in many studies, and the results are not consistent. On the one hand, evidence has been reported suggesting that female talent could enhance competitive advantages of firms (Camp-bell and Minguez-Vera, 2008) because women provide unique resources such as new insights and perspectives to companies and the female is better at communication (Zelechowski et al., 2004). In this line, prior literature finds that women on the board have a positive effect on firm value. Given a sample of 151 German listed firms, Joecks et al. (2012) find that gender diversity positively affects firm value in the specific period. The study of Carter et al. (2003) also sug-gests a positive relationship between gender diversity and firm value, using s sample of 638 Fortune 1000 firms. Adler (2001), use a sample of 25 Fortune 500 firms, find a strong correla-tion between women-friendliness and financial performance. In the more recent studies, Garcia-Meca et al. (2015) perform an international analysis and support that gender diversity positively associated with bank performance calculated by Tobin’s q and ROA. Similarly, Berger et al. (2014) observed that gender diversity improves corporate governance and make banks to be more profitable.
On the other hand, some papers argue that gender diversity does not positively associate with
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using a data for the 2500 largest Danish firms observed during the period 1993-2001, they find the presence of women on boards is negatively correlated with gross profits to sales. Similarly, Shrader et al. (1997) use two accounting measures to investigate the effect of gender diversity on financial value based on a sample of near 200 Fortune 500 firms, and they find a significant negative relationship between them. Consequently, prior literature has mixed findings of how women on boards impact firm financial outcomes, it remains unclear whether gender diversity of boards could bring the desired outcome for firms. Thus, I will test the hypothesis:
Hypothesis 1：Board gender diversity does not influence bank performance. 2.3 Board national diversity and bank performance
Foreign directors also represent one dimension of board diversity, the relationship between the presence of foreign directors on boards and firm performance generates debate in the aca-demic area. There are some similarities and differences between gender diversity and national diversity. They are traditionally underrepresented on boards. Besides, both female and foreign directors are always have advanced educational degrees and broader backgrounds outside the business area (Hillman et al., 2002), in this line, one could argue that they could enhance firm performance by introducing heterogeneity of ideas and experiences. Also, they are both highly visible types of diversity and create positive cognitive and signaling consequences such as in-novation and better image. However, different diversity could have the different influence. Some argue the racial diversity may be more beneficial to firms than gender. According to the finding of Ibarra (1995), racial status has a better influence on the utility of career and task-related networks over gender. Additionally, gender diversity and national diversity are expected to provide different types of information, while female directors are perceived to be better in communication, national diversity brings cultural diversity as critical resources (Richard, 2000).
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with firm value are consistent with the notion that national diversity may reduce information asymmetry and expand cross-border flows of knowledge and technology.
Nevertheless, some argue that foreign directors are less familiar with local regulations and management methods (Masulis et al. (2012), which make it difficult for them to make great management progress. Their study result shows that U.S. firms with more foreign independent directors exhibit significantly poorer performance, especially when the business presence in their home region is less significant. This result is also supported by Garcia-Meca et al. (2015), who perform an international analysis and conclude foreign directors have a negative effect on bank performance. These findings are consistent with the relational demography research in psychology which indicates that more related-oriented diversity could lead to inefficient com-munication and poor outcomes. Further, Douma et al. (2006) argue that the previously docu-mented positive effect of foreign ownership on firm value is significantly attributable to foreign firms that have larger shareholding and longer-term involvement, foreign directors are more likely to sell the shares of an underperforming firm rather than make an effort in corporate restructuring. Based on the different arguments and conflict findings, I will test the hypothesis :
Hypothesis 2: Board national diversity dose not influence bank performance. 2.4 Board age diversity and bank performance
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On the contrary, others find a negative relationship between age diversity and firm value (Ali et al., 2014; Talavera et al., 2018). It is consistent with the notion that homogenous groups could ensure better goal congruence and communication. Murray (1989) argues that directors in sim-ilar age shared simsim-ilar values and influenced by almost same historic events. As a consequence, such homogenous groups are more likely to be familiar with company values and consistent with goals while age diversity may weaken the quality of decision making and make it difficult to reach a consensus. Another reason to expect a negative influence of age diversity on firm performance is that age diversity may weaken firm social performance, since most firms have low age diversity, few firms with high age diversity might encounter reconciliation problems which make them more difficult to handle corporate social responsibility issues. As a result, age diversity weakens firm social performance and strategic changes. (Hafsi & Turgut, 2013; Tarus & Aime, 2014). The conflicting empirical evidence indicates that the effect of age diversity on bank performance can be positive or negative. Given the board age diversity can be perceived as a “double-edged-sword”, I thus hypothesize the following:
Hypothesis 3: Board age diversity does not influence bank performance.
2.5 Moderators
2.5.1 Investor protection
Corporate governance depends on both country-level mechanisms and firm-level mecha-nisms. Investor protection is widely accepted as a country-level mechanism. The institutional environment also acts as governance mechanism to control agency and governance problem, for example, weaker monitoring by shareholders may make companies feel less accountable for financial performance which aggravates agency problems (Mak and Li, 2001). While board of directors is a firm-level mechanism, and firms always make a trade-off between the costs and benefits when setting up these governance mechanisms. We would like to study on how these mechanisms relate to each other, in other words, analyzing the substitution or complementary roles of investor protection on the main relationship.
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investors get better protection in common law countries than in civil law countries.
According to La Porta et al. (1997,1998), there are already many studies examine the positive effects of investor protection on firm performance, better investor protection always lead to faster growth of firms (John et al., 2017), while the effect of investor protection on moderating board of directors is still not clear.
One alternative is that in that investor protection and firm-level governance are complements. Aggarwal, Erel, Stulz, and Williamson (2009) study governance practices across countries, and they find that firm-level governance is relatively less productive in poorer investor protection locations. The reason is the cost outweighs the benefit when firms establish corporate govern-ance mechanisms in weak investor protection countries. In better institution locations, firms could get cheaper external capital, and investing more in governance will be more valuable for firms that require more external funding. So firms with better growth opportunity are expected to invest more in corporate governance to gain more profit. However, if a country’s institution is weak and financial development is low, the cost to control shareholders increase and invest-ment in corporate governance value less. Also, in poorer institution countries, firms are less likely to be committed to the laws protecting minority shareholders, in this case, women and minorities are less likely to influence decisions if they are not represented on key positions. Finally, it could be expected that diverse board would matter more in a better institution and stronger investor protection country.
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2.5.2 Bank regulatory regime
About the moderating role of country-level mechanisms, banking regulatory regime is also an important external governance mechanism, which is necessary to achieve effective monitor-ing as well as internal governance mechanisms (Cremers and Nair, 2005).
Since the bank sector has great opacity and is more independent then the counterparts in non-financial firms, it is more difficult for stakeholders to control managers and get relevant infor-mation, which may cause expropriation issue (Levine, 2004). Directors in bank sector are not only responsible to shareholders, regulators and securities, but also accountable to other stake-holders. Thus, directors in bank sector are subject to more scrutiny than directors in non-finan-cial sectors, and it is more difficult to make contracts that align the interests of managers and stakeholders. Also, banks are highly regulated firms with numerous and disperse stakeholders, and the bank regulation systems vary across the world according to industry size, bank activity and ownership restrictions, official supervisory power, prompt corrective action and deposit insurance design (Barth et al. 2006; Cih´ak et al. 2012). Bank regulation is a governance mech-anism and acts as a special role in bank governance (de Andrés et al., 2012). Given these argu-ments and the importance of banks in economy, it is necessary to analyze whether and how the difference of bank regulatory regime among countries influence the relationship based on pre-vious hypotheses.
Some findings show that the regulation and corporate governance has a complementary re-lationship, in other words, diverse boards are less effective in contexts of weaker bank regula-tion countries, while with a stronger regularegula-tion environment, more effective monitoring are adopted to enhance banks’ safety and soundness. This notion is consistent with the finding of Becher and Frye (2011) as well as Adams and Ferreira (2009), who state regulation and gov-ernance are complements. García-Meca et al. (2015) also find that presence of foreign directors and female directors has less impact on bank performance in poor regulation countries. In this scenario, regulation has a complementary role in bank governance, which indicates bank regu-lation could increase the impact of the diverse board in a stricter regulatory location.
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high bank regulation could reduce agency conflicts as a substitution mechanism. Also, when regulators have more power to monitor directors, the necessity and effectiveness of diverse boards to monitor are decreased (Hagendorff et al., 2008). Thus, it could be expected that bank regulation plays a substitution role on the previous relationship.
3 Methodology
3.1 Population and sample
I obtained data on 1104 listed banks between 2009-2017 from Orbis BankFocus. First, this research is focused on bank performance, so I collected financial data of commercial banks, cooperative banks, saving banks and bank holding companies. Second, the analysis is a cross-country analysis; the data has a worldwide geographic distribution which includes Eastern Eu-rope, Far East and Central Asia, North America, South and Central America, Western Europe. Third, the data of board diversity is also available on Orbis BankFocus, I obtained the age, gender and nationality of directors on boards. However, some observations are not available at times, so it is an unbalanced sample.
Table 1 presents the sample distribution by world region. There are 74 countries in the whole sample, as the table shows, higher percentages refer to the banks from North America, account-ing for 57% of total banks. When it comes to geographic diversity, 617 belong to US banks. Since most of the banks locate in North America in the whole sample, I admit the observations has an unequally distributed nature.
Table 1. Sample distribution
3.2 Variables
3.2.1 Dependent variables
I measure bank performance by using Tobin’s Q, the data of Tobin’s Q is collected from Orbis BankFocus, which is calculated as market capitalization divided by total assets. Tobin’s Q is used as a main measure of performance because it is a market-based measure that reflects
Distribution of banks by world region
Total North America Eastern Europe Far East and Central Asia South and Central America Western Europe
1104 634 35 249 41 145
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unstructured and volatile bank performance well. As the regard to testing the robustness of the analysis, return on assets (ROA) is used as the complementary measure of performance and Z-score is used as a measure of risk. ROA is calculated as net income divided by average total assets, Z-score is calculated based on the most usual proxy: return on assets plus the equity-to-assets ratio divided by the standard deviation of the return on equity-to-assets. Because Z-score is highly skewed, I take the natural log of the Z-score in further analysis. ROA is an accounting-based measure for firm performance and is widely used as an overall profitability measure (Arena et al., 2015). In terms of risk, Z-score provides a more direct measure of soundness (Beck et al., 2013; Talavera et al., 2018). A higher score indicates lower risk, in other words, a higher Z-score implies a lower probability of insolvency. These measures are chosen because bank per-formance could be captured by both profitability and risk, and they are widely used to represent bank performance and risk in previous studies (Arena et al., 2015; Beck et al., 2013; Garcia Meca et al., 2015; Talavera et al., 2018).
3.2.2 Independent variables
In this research, three independent variables are used to explain board diversity. The first
independent variable is the presence of women in the board of directors (%WOMEN), the sec-ond is the presence of foreigners in the board of directors (%FOREIGNERS), and the third is the age of board of directors (AGE div). These three variables are calculated as the percentage of female and foreign directors on boards and log of the standard deviation of board age, re-spectively. The three factors of board diversity are separately used in the regression to look at their relationship with bank performance respectively. The log of the standard deviation of board age (LnSD) is a common measure of age diversity (Talavera et al., 2018). Nationality and gender diversity are associated with these directors’ representation in boardrooms, previous studies also use the proportion of women and foreign directors as the proxy for board diversity (Setiyono and Tarazi, 2014; Garcia Meca et al., 2015). The three factors of board diversity are used together in the regression model to test the hypothesis.
3.2.3 Moderating variables
To examine the substitution or complementary roles of investor protection (IP) and bank
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self-dealing transaction. This variable is obtained from La porta et al (2005), in which the index is calculated for 72 countries based on legal rules prevailing in 2003. Compared to the earlier index of anti-director rights (La Porta et al. 1997, 1998), the ADI addresses the ways in which the law deals with corporate self-dealing in a more theoretically grounded way (La porta et al. 2005). ADI ranges from 0 to 1, a higher value indicates better investor protection environment. Second, the variable used to define the characteristics of the banking industry is obtained from Cihák et al. (2012) and Barth et al. (2013). The variable for bank regulatory regime (BR) is prompt corrective power (PCP), it measures whether a law establishes predetermined levels of bank solvency deterioration that force automatic actions, such as intervention, PCP ranges from 0 to 6, a higher value indicates more promptness in responding to problems. To capture the impact of IP and BR, interaction terms are used in the regression model.
3.2.4 Control variables
To avoid biased results, control variables are included in the regression model. The control
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3.3 Model of analyses
As previously noted, I built an unbalanced panel data of 1104 banks for the period of 2009-2017. Using the panel data enables us to analyze observations in consecutive years for same banks, so I use the following panel data model to test the hypotheses. The error term is broken down into two parts: the combined effect 𝜇𝑖𝑡 and the individual effect 𝜀𝑖. According to the
hypotheses, %WOMEN, %FOREIGNERS and AGE div are included as explanatory variables to analyze the impact of board diversity on bank performance, then the moderating effect of investor protection and banking regulation on the main relationship is tested. Moreover, the control variables previously detailed are included (Bsize, %Equity, %Loans, %Cost, %Liq ), as well as variable representing year (Year). Analytically, the general regression model is:
𝑄//𝑅𝑂𝐴𝑖𝑡= 𝛽0+ 𝛽1𝐷𝑖𝑣𝑒𝑟𝑠𝑖𝑡𝑦𝑖𝑡+ 𝛽2𝑀𝑜𝑑𝑒𝑟𝑎𝑡𝑜𝑟𝑖𝑡+ 𝛽3𝐷𝑖𝑣𝑒𝑟𝑠𝑖𝑡𝑦 ∗ 𝑀𝑜𝑑𝑒𝑟𝑎𝑡𝑜𝑟𝑖𝑡+
𝛽4𝐶𝑜𝑛𝑡𝑟𝑜𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑠 + ∑ 𝛽𝑘𝑌𝑒𝑎𝑟𝑡+ 𝜀𝑖+ 𝜇𝑖𝑡 (1)
Table 3 presents the descriptive statistics of variables in this research: the dependent variables (Tobin’s q, ROA and Z-score), independent variables (%WOMEN, %FOREIGNERS and AGE div), and control variables (Bsize, %Equity, %Loans, %Cost, %Liq). As noted, the mean of board diversity is not low, which is comparable with the study based on 159 banks in nine countries reported by Garcia-Meca et al. (2015), the presence of women and foreign directors are 21.3% and 37.8% respectively, and the LnSD of board age is 2.618. Regarding country-level moderators, the mean value of investor protection (ADI) is 0.468 and the value ranges from 0.2 to 1; the mean value of bank regulation (PCP) is 2.614 and the value ranges from 0 to 6.
variables is given in table 2.
Table 2. Description of control variables
Control variables Measurement
Board size (Bsize) Total number of directors on the board Capital adequacy (%Equity) The ratio of equity to total assets Asset quality (%Loans) Impaired loans divided by gross loans, Management quality (%Cost) The ratio of cost to total income
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Table 3. Descriptive statistics
Mean Standard deviation Maximum Minimum
ROA 0.010 0.012 0.096 -0.093 Tobin’s q 0.119 0.104 1.400 0.002 Z-score 1.271 0.336 2.187 0.336 %WOMEN 0.213 0.128 0.588 0.000 %FOREIGNERS 0.378 0.285 1.000 0.000 AGE div 2.618 0.929 4.709 -0.792 ADI 0.468 0.214 1.000 0.200 PCP 2.614 2.257 6.000 0.000 Bsize 15.216 5.434 34.000 2.000 %Equity 10.568 5.713 68.445 1.914 %Loans 4.679 7.904 94.111 0.000 %Cost 61.795 17.055 304.786 24.119 %Liq 20.086 20.783 252.023 0.096
ROA, the return on average total assets. Tobin’s Q, market capitalization divided by total assets. Z-score, return on assets plus the equity-to-assets ratio divided by the standard deviation of the return on equity-to-assets. WOMEN, the percentage of female directors on the board. %FOREIGN-ERS, the percentage of foreign directors on the board. AGE div, the log of the standard deviation of board age (LnSD). IP is the level of investor protection in each country. BR is the level of bank regulation in each country. %WOMEN*IP/BR, %FOREIGNERS*IP/BR and AGE div*IP/BR represent the role of different diversity types at different levels of investor protection or bank regulation. Bsize, the total number of directors on the board. %Equity, the ratio of equity to total assets. %Loans, the impaired loans divided by gross loans, %Cost, the ratio of cost to total income. %Liq, the ratio of liquid asset to total deposits&borrowings.
4 Empirical results
4.1 Correlation
Table 4 shows the autocorrelation testing results of variables proposed for this study. A vari-able is perfectly correlated with another varivari-able if the value is 1 or -1 (Brooks., C. 2014). The correlations between the independent variables are not very high. Also, it can be seen %Liq presents the highest correlation (coef. 0.308) with Tobin’s q (dependent variable). ROA (de-pendent variable) presents the highest correlation with %Equity, with a coefficient of 0.611. Z-score (dependent variable) presents the highest correlation with PCP, with a coefficient of 0.186. There are no high values obtained for the coefficients between dependent and independent var-iables. Therefore, there is no evidence for multicollinearity and endogeneity in the models.
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Table 4. Correlation of variables of complete sample
ROA, the return on average total assets. Tobin’s Q, market capitalization divided by total assets. Z-score, return on assets plus the equity-to-assets ratio divided by the standard deviation of the return on assets. WOMEN, the percentage of female directors on the board. %FOREIGNERS, the percentage of foreign directors on the board. AGE div, the log of the standard deviation of board age (LnSD). IP is the level of investor protection in each country. BR is the level of bank regulation in each coun-try. %WOMEN*IP/BR, %FOREIGNERS*IP/BR and AGE div*IP/BR represent the role of different diversity types at different levels of investor protection or bank regulation. Bsize, the total number of directors on the board. %Equity, the ratio of equity to total assets. %Loans, the impaired loans divided by gross loans, %Cost, the ratio of cost to total income. %Liq, the ratio of liquid asset to total deposits&borrowings.
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4.2 Multiple Regressions
I use the following models to test the impact of board diversity on Tobin’s q. Regarding the moderators, as they may act as substitution or complementary roles on the previous relationship, I add the interaction terms, so the moderation effect of investor protection (IP) and bank regu-latory (BR), can also be estimated using regression model 1a (equation2) and 1b (equation3):
Tobin′s q 𝑖𝑡= 𝛽0+ 𝛽1%𝑊𝑂𝑀𝐸𝑁𝑖𝑡+ 𝛽2%𝐹𝑂𝑅𝐸𝐼𝐺𝑁𝐸𝑅𝑆𝑖𝑡+ 𝛽3𝐴𝐺𝐸𝑑𝑖𝑣 + 𝛽4𝐼𝑃+𝛽5%𝑊𝑂𝑀𝐸𝑁 ∗ 𝐼𝑃𝑖𝑡+ +𝛽6%𝐹𝑂𝑅𝐸𝐼𝐺𝑁𝐸𝑅𝑆 ∗ 𝐼𝑃𝑖𝑡+𝛽7%𝐴𝐺𝐸𝑑𝑖𝑣 ∗ 𝐼𝑃𝑖𝑡+ 𝛽6𝐵𝑆𝐼𝑍𝐸𝑖𝑡+ 𝛽7%𝐸𝑞𝑢𝑖𝑡𝑦𝑖𝑡+ 𝛽8%𝐿𝑜𝑎𝑛𝑠𝑖𝑡+ 𝛽9%𝐶𝑜𝑠𝑡𝑖𝑡+ 𝛽10𝐿𝐼𝑄𝑖𝑡+ ∑ 𝛽𝑘𝑌𝑒𝑎𝑟𝑡+ 𝜀𝑖+ 𝜇𝑖𝑡 (2) Tobin′s q 𝑖𝑡= 𝛽0+ 𝛽1%𝑊𝑂𝑀𝐸𝑁𝑖𝑡+ 𝛽2%𝐹𝑂𝑅𝐸𝐼𝐺𝑁𝐸𝑅𝑆𝑖𝑡+ 𝛽3𝐴𝐺𝐸𝑑𝑖𝑣 + 𝛽4𝐵𝑅+𝛽5%𝑊𝑂𝑀𝐸𝑁 ∗ 𝐵𝑅𝑖𝑡+ +𝛽6%𝐹𝑂𝑅𝐸𝐼𝐺𝑁𝐸𝑅𝑆 ∗ 𝐵𝑅𝑖𝑡+𝛽7%𝐴𝐺𝐸𝑑𝑖𝑣 ∗ 𝐵𝑅𝑖𝑡+ 𝛽6𝐵𝑆𝐼𝑍𝐸𝑖𝑡+ 𝛽7%𝐸𝑞𝑢𝑖𝑡𝑦𝑖𝑡+ 𝛽8%𝐿𝑜𝑎𝑛𝑠𝑖𝑡+ 𝛽9%𝐶𝑜𝑠𝑡𝑖𝑡+ 𝛽10𝐿𝐼𝑄𝑖𝑡+ ∑ 𝛽𝑘𝑌𝑒𝑎𝑟𝑡+ 𝜀𝑖+ 𝜇𝑖𝑡 (3)
21 protection level.
The results of model 1b show the effects of board diversity on Tobin’s q and the moderating effect of bank regulation. As Table 5 shows, the explanatory of this model (0.563) is higher than model 1a (0.470). %WOMEN (coef. -0.198), %FOREIGNERS (coef.-0.069) and AGEdiv (coef.-0.020) are all impact negatively on Tobin’s q and these effects are statistically significant at the 99% confidence level, which indicates a more diverse board impacts negatively on bank performance. The results confirm Westphal and Bednar’s (2005) extension of social psychology theory that different perspectives and cognitive abilities in the board generate conflicts and are likely to hinder firm development, and also support the evidence of Ferreira (2010) and Mueller (2003) that a more diverse board lead to negative financial outcomes. In my case, the incon-sistent results might be due to missing moderator variables, for example, the actual control power of female directors on the boards. Similarly, Miller and Triana (2009) observe the incon-sistent findings when studying the relationship between demographic diversity and firm perfor-mance, they argue the variable about firm’s environment should be set up to achieve the impact of board diversity.
22
Table 5. Explanatory models for Tobin’s Q
Tobin’s Q, market capitalization divided by total assets. %WOMEN, the percentage of female directors on the board. %FOREIGNERS, the percentage of foreign directors on the board. AGE div, the log of the standard deviation of board age (LnSD). IP is the level of investor protection in each country. BR is the level of bank regulation in each country. %WOMEN*IP/BR, %FOREIGNERS*IP/BR and AGE div*IP/BR represent the role of different diversity types at different levels of investor protection or bank regulation. Bsize, the total number of directors on the board. %Equity, the ratio of equity to total assets. %Loans, the impaired loans divided by gross loans, %Cost, the ratio of cost to total income. %Liq, the ratio of liquid asset to total deposits&borrowings
* Confidence at the 90% level. ** Confidence at the 95% level. ***Confidence at the 99% level.
Model 1a (IP) Model 1b (BR)
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Table 6. Explanatory models for ROA
ROA, the return on average total assets. %WOMEN, the percentage of female directors on the board. %FOREIGNERS, the percentage of foreign directors on the board. AGE div, the log of the standard deviation of board age (LnSD). IP is the level of investor protection in each country. BR is the level of bank regulation in each country. %WOMEN*IP/BR, %FOREIGNERS*IP/BR and AGE div*IP/BR represent the role of different diversity types at different levels of investor protection or bank regulation. Bsize, the total number of directors on the board. %Equity, the ratio of equity to total assets. %Loans, the impaired loans divided by gross loans, %Cost, the ratio of cost to total in-come. %Liq, the ratio of liquid asset to total deposits&borrowings
* Confidence at the 90% level. ** Confidence at the 95% level. ***Confidence at the 99% level.
Model 2a (IP) Model 2b (BR)
24
4.3 Robust analysis
4.3.1 Explanatory model for ROA
To test the robustness of results, I re-estimated the previous model by using another measure
of bank performance, return on assets (ROA). ROA is an accounting-based measure and is widely used as an overall profitability measure (Arena et al., 2015; Garcia-Meca et al. 2015). Table 6 presents the results obtained in order to explain the effect of board diversity on ROA and the moderating effect of investor protection and bank regulation. The explanatory power of model 2a (0.315) and model 2b (0.316) are lower than the previous regression. Nonetheless, the results indicate that %WOMEN and %FOREIGNERS in both model 2a and model 2b are not significant predictors of the ROA, which is in accordance with the results of the performed regression model 1a. The variable AGEdiv in model 2a shows a negative impact on ROA, sta-tistically significant at the 95% confidence level, which is consistent with the finding of model 1b. It also supports the findings of Talavera et al. (2018), who find the age diversity has a sig-nificant and negative influence on bank profitability, using a measure of ROA. The positive coefficient of interaction term AGE div*IP with a p-value of 0.000 is remarkable because the moderation variable of IP is not significant in the previous model. It suggests that the negative impact of age diversity on ROA is more limited in environments with higher levels of investor protection, which indicates investor protection plays a substitution role in the relationship of age diversity and ROA.
4.3.2 Explanatory model for Z-score
Bank performance could also be captured by risk. In order to better investigate the relation-ship between board diversity and bank performance, I consider the Z-score to capture risk (Lepetit et al., 2008; Barry et al., 2011). Table 7 reports the result of following regression model:
𝑍𝑠𝑐𝑜𝑟𝑒𝑖𝑡= 𝛽0+ 𝛽1%𝑊𝑂𝑀𝐸𝑁𝑖𝑡+ 𝛽2%𝐹𝑂𝑅𝐸𝐼𝐺𝑁𝐸𝑅𝑆𝑖𝑡+ 𝛽3𝐴𝐺𝐸𝑑𝑖𝑣 + 𝛽4𝐵𝑆𝐼𝑍𝐸𝑖𝑡+ 𝛽5%𝐿𝑜𝑎𝑛𝑠𝑖𝑡+
𝛽6%𝐶𝑜𝑠𝑡𝑖𝑡+ 𝛽7𝐿𝐼𝑄𝑖𝑡+ ∑ 𝛽𝑘𝑌𝑒𝑎𝑟𝑡+ 𝜀𝑖+ 𝜇𝑖𝑡 (4)
25
Table 7. Explanatory model for Z-score
Z-score, return on assets plus the equity-to-assets ratio divided by the standard deviation of the return on assets. %WOMEN, the percentage of female directors on the board. %FOREIGNERS, the percentage of foreign directors on the board. AGE div, the log of the standard deviation of board age (LnSD). Bsize, the total number of directors on the board. %Loans, the impaired loans divided by gross loans, %Cost, the ratio of cost to total income. %Liq, the ratio of liquid asset to total deposits&borrowings
* Confidence at the 90% level. ** Confidence at the 95% level. ***Confidence at the 99% level.
gender and national diversity might perform better, which is consistent with the result of model 1b. The variable AGEdiv has a positive coefficient which indicates a board with higher age diversity is associated with lower bank risk. A possible explanation is that directors of different age have different view on risk. Thus, they are more likely to slow down the decision process and lead to more board scrutiny, which may result in less extreme outcomes (Talavera et al. 2018).
5 Conclusion
The question of this research is: “What is the effect of board diversity, based on the gender, nationality and age of directors in the boards, on bank performance, and the influence of inves-tor protection or bank regulation on this effect?” While most previous studies focus on one country, this research has an international sample contains banks in 74 countries and the inter-national basis analysis is helpful to understand the influence of institutional differences. Considering the results of all regressions does not show a significant positive relationship
Coef. (Std. Err.) t (p-value)
26
between board diversity and Tobin’s q or ROA, this research concludes that board diversity, based on gender, nationality and age of directors in boards, has null or negative effects on bank performance. According to previous literature and relevant theories, the negative impact of board diversity on performance might be due to that demographic differences weaken cohesion in groups and hinder the decision process. In my case, the inconsistent results might be due to missing moderator variables, for example, the actual control power of female directors on the boards. When the female, foreign or young directors are positioned in non-executive positions and have trouble to represent on key board committees, the influence of gender diversity, na-tional diversity or age diversity is less likely to show up.
Regarding the analyses of legal and institutional environment differences among countries, the results of this research shows that bank regulation plays a substation role on the relationship between board diversity and performance. In other words, strong bank regulation reduces the negative effect of gender and nationality diversity, the negative effect of gender and nationality if higher in countries with lower bank regulation. In strong bank regulation countries, the im-plicit bailout safeguards and exim-plicit protection might reduce the negative impact of board di-versity. In the ROA model, the moderating effect of investor protection on the relationship of age diversity and bank performance is similar to the bank regulation for age diversity. The neg-ative effect of age diversity is higher in low investor protection locations. It might due to with better investor protection, young and old directors are more likely to reach agreements of deci-sions in the interests of shareholders.
This research helps to better understand relationship between board diversity and bank per-formance, using an international based sample, which is not common in previous studies. This research also has some limitations. First, the sample of 1104 listed banks are unequally distrib-uted across countries, for instance, more than a half (617) of banks are located in America. This may lead to a biased result for banks in other world regions. Second, many factors influence a country’s legal and institutional environment. To investigate what effect they have on board diversity, more variables could be included, and it could also enhance the explanatory power of regression models.
27
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