Does board diversity reduce the probability of financial distress? Evidence from Chinese firms

Abstract

This paper empirically investigates the impact of cognitive board diversity in education, expertise, and tenure facets on financial distress likelihood in the emerging economy of China. This study examines how this relationship varies across State-Owned Enterprises (SOEs) and Non-State-Owned Enterprises (NSOEs). Paper argues that the Chinese stock market, as a typical emerging market, is an excellent laboratory for studying the impact of board diversity on the probability of financial distress. Its underdeveloped financial system and inadequate investor protection leave firms unprotected from financial hardship. A sample of 12,366 observations from 1,374 firms from 2010 to 2018 shows that cognitive diversity qualities are positively linked with Z-score, implying that directors with different educational backgrounds, financial skills, and tenures can assist in reducing the probability of financial distress. Cognitive board diversity reduces the likelihood of financial distress in SOEs and NSOEs. However, tenure diversity is insignificant in all cases. Furthermore, the robustness model “two-step system Generalized Methods of Moments (GMM)” demonstrated a positive association between educational diversity, financial expertise, and financial distress scores. The results have significant implications for researchers, managers, investors, regulators, and policymakers.

Does corporate social responsibility mediate the relationship between board diversity and financial distress: evidence from an emerging economy?

“…Endogeneity difficulties in regression models can be caused by a variety of variables, including measurement inaccuracy, simultaneity and reverse causality. Endogeneity can have a major impact on inference and can be removed by using the GMM technique (Lin et al , 2019; Aksoy and Yilmaz, 2023; Ali et al , 2022; Guizani and Abdalkrim, 2023). As a result, the dynamic GMM estimator model was used to study the effect of board diversity on FD.…”

“…However, such studies are inconclusive and cannot be applied to an emerging economy like Pakistan due to large differences in financial, accounting and economic systems (as cited in Altman et al , 2007; Zhang et al , 2013). Third, empirical research has found a link between board diversity and the risk of FD (Ali et al , 2022; Yousaf et al , 2021; Kristanti et al , 2016; Manzaneque et al , 2016). Although researchers suggested that mediating variables be investigated to determine how board diversity improves firm performance (Harjoto et al , 2019; Miller and Triana, 2009).…”

CEO's self-oriented perfectionism, strategic decision comprehensiveness and firm resilience

“…When competitive uncertainty is low, a firm's competitive environment is stable and external risk is predictable (Ali et al, 2022a). CEOs with high self-oriented perfectionism can pay adequate attention to thoroughness and detail and identify valuable information for decision-making.…”

Does board activeness strengthen the relationship between structure of corporate ownership and firm performance?

“… Ali et al (2022) asserted the significance of the multifunctionality of the board in reducing the distress situation of the firm. The board diversity benefits the firm during the interim meetings.…”