Manuscript Type: EmpiricalResearch Question/Issue: We investigate the indirect effect of a board's demographic diversity on firm performance via board monitoring in a context where boards are relatively homogeneous with respect to structural diversity, using data from Turkey. We contextualize our investigation by exploring the influence of ownership configurations on the effect of diversity. Research Findings/Insights: We find a positive and non-linear relationship between demographic diversity and performance, mediated by the board's monitoring efforts. The effect of monitoring is found to be contingent upon (moderated by) the controlling shareholders' propensity to expropriate, measured by the deviation of control rights from cash flow rights, i.e. the wedge. We report that demographic diversity enhances firm performance by mitigating the negative effect of the wedge on board monitoring. Theoretical/Academic Implications: Our results provide empirical support for the importance of contextual factors in the relationship between diversity and performance. Our framework and the compound diversity and board-monitoring indices we construct may prove useful to researchers. Practitioner/Policy Implications: Regulators can use our findings in formulating recommendations or regulations related to desirable characteristics of boards. Our results are also instructive for investors and proxy advisors and indicate that the mere existence of monitoring vehicles may be insufficient to prevent expropriation by dominant shareholders, but diverse boards may mitigate the propensity to expropriate. Board members and shareholders should also benefit from the findings in creating boards that are more diligent monitors.

Recent financial reporting and auditing scandals on both sides of the Atlantic have led to a global realisation of the importance of sound corporate governance (CG) practices in alleviating the agency problems in the corporate form of business and for efficient allocation of capital in international markets. Transparency and disclosure (T&D) practices followed by firms are an important component and a leading indicator of CG quality. Transparent and full-disclosure of information is especially vital for Turkey where external capital is necessary to sustain the high growth rate and the biggest agency problem centres on asymmetric information and expropriation by majority shareholders. Copyright (c) 2006 The Authors; Journal compilation (c) 2006 Blackwell Publishing Ltd.

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