Board diversity and investment efficiency: evidence from China

Purpose The purpose of this study is to investigate the relationship between board diversity measured as relation-oriented, task-oriented and board overall diversity and firm's investment efficiency. Design/methodology/approach This study estimates four dimensions of board diversity, including age, gender, tenure and education. The four dimensions are further categorized in relation-oriented diversity (i.e. age and gender), task-oriented diversity (i.e. tenure and education) and overall board diversity (relation and task oriented). Panel data analysis is used to examine the board diversity-investment efficiency relationship in Chinese listed firms during the years 2003-2018. The findings of the study are robust to a battery of econometric techniques. Findings This study finds relation-oriented, task-oriented and overall diversity of a board curb investment inefficiency by discouraging sub-optimal investment (over- or under-investment). In other words, board diversity improves firms' investment efficiency. Practical implications The results suggest that board diversity plays a significant role in corporate decisions. The findings illustrate that board diversity disciplines the management, reduces agency conflicts and thereby improves corporate governance, resulting in higher investment efficiency. Originality/value This study has two important contributions. First, this study extends the prior literature of investment efficiency by considering socio-psychological dimension of the board diversity by constructing relation- and task-oriented diversity. Second, contrary to earlier studies on board diversity, this study takes four facets of board diversity, i.e. age, gender, education and tenure that improve corporate governance mechanism.