Directors’ Diversity and the Economic Value of Equity

Abstract

The paper examines the effect of directors’ demographic and cognitive diversity on the economic value of equity based on longitudinal data from the top 15 Deposit Money Banks (DMBs) in Nigeria. The study finds steadily robust evidence that shows foreign and female directors at critical mass representation positively influence banks’ net worth (a proxy of the economic value of equity). Contrary to the hypothesis, the result of cognitive diversity was rather inconclusive due to the diverse direction of causality. While the effect of directors with Bachelor of Law degrees and industry experience shows a significant negative effect, the impact of directors with business-related degrees though positively linked to the economic value of equity but remained statistically insignificant. With average sampled directors having over 23 years of industry experience, the study concluded that excessive industry knowledge is injurious to financial performance. This is because these directors are perhaps more cautious about their reputation and thus are likely to exhibit diminishing marginal utility for wealth maximization.

Women Directors: An Empirical Test of Critical Mass Hypothesis

“…Some directors may be non-executives, yet maintain close ties with the executives, which potentially weakens their objectivity and ability to checkmate executive excesses and overbearing influence on corporate boards (Liao et al 2015). Likewise, it is important to note that the finding of an inverse direction of causality is not strange but rather consistent with findings reported in past studies (see Abdullahi & Lawal, 2023, Chatterjee & Nag 2023Marpaung et al, 2022;Okoyeuzu et al, 2021;Nwude & Nwude, 2021). This finding further substantiates the rationale behind separation of ordinary non-executives i.e., "grey directors" from independent non-executive directors who are most likely to act differently (see Sarkar & Selarka, 2021;Lawal, 2016).…”

“…Gender diversity has remained one of the most debated and well researched board demographics (Almor et al, 2022;Menicucci & Paolucci, 2022;Nuber & Velte, 2021;Arioglu, 2020;Saeed et al, 2016;Brammer et al, 2007). Over the past two decades, researchers have deployed numerous models including cross-field adaptation of assortment theories in the study of gender diversity and its relevance to board effectiveness and task performance (Abdullahi & Lawal, 2023;Chatterjee & Nag, 2023;Chen et al, 2021;Li & Chen, 2018;Gordini & Rancati, 2017). Dominant among these theories include agency, resource dependency, stewardship, signalling, stakeholders, managerial hegemony, and human capital theories (Ferdous et al, 2023;Okoyeuzu et al, 2021;Nwude & Nwude, 2021;Simionescu et al, 2021;Bernile et al, 2018;Garba & Abubakar, 2014).…”

“…Interestingly, research and policy discourse on board gender diversity has metamorphosed into two dominant knowledge streams: equality and business case (Harjoto et al, 2018;Lawal, 2016;Dowling & Aribi, 2013;Carter et al, 2010;Erhardt et al, 2003). The equality case (also referred to as corporate fair play) is a demographic-based proposition premised on gender justice that promotes corporate fairness and addresses board demographics overly skewed in favour of male directors (Abdullahi & Lawal, 2023;Kolev & McNamara, 2020).…”