The Effect of Corporate Board Diversity on Firm Risk: An Empirical Analysis of U.S. Public Companies

Abstract

In this thesis, I examine the relationship between the ethnic/racial diversity of corporate boards and firm risk. There exists an abundance of literature on the effects of diversity on firm performance, but significantly less on the effects of diversity on the variability of that performance. Additionally, in the literature that does exist, there is little consensus on either the direction or magnitude of diversity’s effects. For this reason, my work represents a worthwhile contribution to the subject of corporate governance. My analysis is conducted on publicly listed U.S. firms, between the years of 1999 and 2017, which are constituents of the S&P 1500 index of large-, mid- and small-cap companies. I utilize dynamic panel specifications to combat reverse causality. In contrast to existing literature, I find little evidence of an economically meaningful relationship between the ethnic/racial diversity of corporate boards and firm risk (as proxied by the implied volatility of at-the-money equity options). This is after using a variety of combinations of dependent and independent variables, as well as examining subsets of firms.