Board diversity and corporate risk:

evidence from China

Kalim Ullah Bhat, Yan Chen, Khalil Jebran and Zulfiqar Ali Memon

Kalim Ullah Bhat is based at Abstract

School of Accounting, Purpose – The purpose of this study shows how overall board diversity influences corporate risk-taking.
Dongbei University of Board diversity is quantified into task-oriented diversity (tenure and education) and relation-oriented
Finance and Economics, diversity (age and gender). Further, this study tests whether the association of board diversity and
Dalian, China. Yan Chen is corporate risk varies across state-owned firms (SOEs) and non-state-owned firms (NSOEs).
based at China Internal Design/methodology/approach – The authors used a sample of Chinese listed firms over the period
1999-2017. The results are estimated using the fixed-effects model. To deal with the endogeneity
Control Research Center
problem and single model bias, the authors use a dynamic model, i.e. two-step generalized method of
and School of Accounting,
moment’s model.
Dongbei University of
Findings – The results show that both task-oriented and relation-oriented diversity reduces corporate
Finance and Economics, risk. Further, the authors document that overall board diversity reduces risk-taking across different types
Dalian, China. Khalil Jebran of firms, that is, SOEs and NSOEs. These results are consistent after controlling for endogeneity problems.
and Zulfiqar Ali Memon are Practical implications – The results provide implications for enhancing corporate governance practices
both based at the School of by considering overall board diversity as an important factor influencing corporate decisions. The
Accounting, Dongbei findings suggest that policymakers and shareholders should consider different diversity attributes
University of Finance and important for the composition of a board, which can enhance board outcomes.
Economics, Dalian, China. Originality/value – Most of the prior studies considered only one dimension of diversity, and therefore,
have overlooked the overall board diversity. Unlike prior studies, this study considers four board diversity
attributes – age, gender, tenure and education, and further tests their association with corporate risk.
Further, this study also examines the effect of overall diversity on corporate risk in SOEs and NSOEs.
Keywords Board diversity, Relation-oriented diversity, Task-oriented diversity, Corporate risk,
Chinese firms
Paper type Research paper

1. Introduction
In recent years, board diversity has received considerable attention among policymakers,
researchers and corporations. To promote diversity, most of the countries have passed
legislation to ensure the presence of female directors on corporate boards (Smith, 2014).
Most of the studies in the literature have considered gender diversity as the only important
attribute of board diversity (Anderson et al., 2011; Carter et al., 2003; Minton et al., 2014),
leaving behind the fact that indeed board is a group of people, and it has many diverse
attributes such as age, tenure and education. Therefore, most of the prior studies are
limited to considering only a single attribute of board diversity. This study is an attempt to fill
this gap by considering many facets of board diversity. Specifically, we consider four
diversity attributes of a board that are age, gender, tenure and education. We further
Received 1 January 2019 quantified diversity attributes into relation-oriented dimensions such as age and gender,
Revised 17 April 2019
2 August 2019 which are considered as surface-level differences, and task-oriented dimension, such as
29 August 2019 tenure and education, which are considered as job-related differences.
17 September 2019
6 October 2019
8 October 2019
In this study, we argue that board diversity can influence corporate risk. We draw our
Accepted 25 November 2019 hypothesis from theories in-group diversity and performance, specifically intergroup

PAGE 280 j CORPORATE GOVERNANCE j VOL. 20 NO. 2 2020, pp. 280-293, © Emerald Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-01-2019-0001
contact (Allport, 1954), similarity-attraction theory (Berscheid and Walster, 1978), social
categorization (Turner et al., 1987) and cognitive diversity theories. The expectations model
of diversity (McGrath et al., 1995) provides a base through which the social categorization
process in diverse groups results in a differential impact of task-oriented dimension (i.e.
education and tenure) and relation-oriented dimension (i.e. age and gender) on board’s
advisory and monitoring role. We expect that higher diversity can reduce corporate risk.
Our argument is based on the view that a heterogeneous board includes people having
different characteristics, which may reduce the risk in an uncertain environment. In addition,
a diverse board can increase the monitoring and advisory role, and therefore, can help a
firm to reduce the risk.
We test the association between board diversity and corporate risk in Chinese listed firms.
China offers a unique institutional background to study the phenomena for at least two
reasons. First, China is still an emerging market, and corporate governance is at the
developing stage. There is a need to improve corporate governance mechanisms by
introducing various governance codes. Thus, it is important to investigate how several
dimensions of board diversity can improve governance practices by reducing corporate
risk in the Chinese context. Second, several studies in the context of China have examined
the impact of diversity on corporate outcomes but most of the studies are limited to
considering only one aspect of board diversity, for example, gender or age (Liu et al., 2014;
Saeed et al., 2016; Talavera et al., 2018). There is no evidence of how other dimensions of
diversity (such as tenure and education) influence corporate risk in the Chinese context.
The above arguments suggest that China is a valid testing ground to test the effect of
overall board diversity on corporate risk.
This study offers two important contributions. First, unlike prior studies that considered only
one aspect of diversity, such as gender and age (Adeabah et al., 2019; Alazzani et al.,
2017; Booth-Bell, 2018; Groening, 2019; Ullah et al., 2019; Kyaw et al., 2017; Van der Walt
et al., 2006), this study considers four important board diversity attributes and further
classified these attributes into relation-oriented (age and gender) and task-oriented (tenure
and education). This study is the first to document that task-oriented and relation-oriented
diversity can reduce corporate risk in the Chinese context. The results provide new insights
by showing that overall board diversity is indeed an important factor associated with
corporate risk.
Second, this study provides new evidence by illustrating that the effect of board diversity on
corporate risk remains consistent across state-owned firms (SOEs) and non-state-owned
firms (NSOEs). The findings enrich our understanding that board diversity is an important
attribute influencing corporate decisions regardless of the nature of the enterprise.
The rest of the study proceeds as follows. Section 2 discusses hypotheses development.
Section 3 discusses the data and methodology. Section 4 reports results. Finally, Section 5
concludes.

2. Hypotheses development
In the context of the organizational demography approach, upper echelons research
dominates in the literature (Pfeffer, 1983) and primarily investigated the nexus between top
management team (TMT) members’ demographic characteristics and organizational
outcomes by using quantitative large-sample methods. Although there are many studies on
TMT heterogeneity research has revealed contrary results, and the question of whether TMT
heterogeneity is beneficial for firms remains open (Cannella et al., 2008). The empirical
findings on the impact of TMT demographic diversity on corporate performance vary from
positive (Barsade et al., 2000; Carpenter, 2002), through non-significant (Ferrier, 2001; West
and Schwenk, 1996) to negative (Michel and Hambrick, 1992). Furthermore, Nielsen (2010)
thoroughly reviews the empirical studies on TMT heterogeneity and suggests that the clarity

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 about the analysis both theoretically and empirically is still an issue, and doing
comprehensive analysis is encouraged while investigating the nexus between TMT diversity
and organizational outcomes.
We extend this line of research by considering how several attributes of TMT diversity
influences corporate risk. By considering four diversity attributes – gender, age, education
and tenure, this study considers age and gender as relation-oriented attributes of diversity
and education and tenure as task-oriented diversity of attributes.

2.1 Relation-oriented board diversity

Relation-oriented board diversity refers to the diverse workgroup with respect to
demographic characteristics, i.e. age and gender. Age diversity can be further described
as workgroup having diverse age groups, and gender diversity can be described as a
diverse gender workgroup. The relation-oriented board diversity is quantified into two
dimensions – age and gender.
The expectation model explains how relation-oriented and task-oriented board diversity
impacts group performance and consensus (McGrath et al., 1995). The model elaborates
that group members of a workgroup identify themselves with their social categories, which
they form by using some similar characteristics (for example, age and gender). Further,
those social categories are used to infer unique underlying features of group members (for
example, values, beliefs and norms) and expectations are set from each group to behave in
a particular way, like their behavior can be favorable for some and unfavorable for others,
which can give rise to in-group and out-group bias.
Out-group and in-group relation-oriented attributes can create perceived similarities and
differences among subgroups of a workgroup (Pelled et al., 1999; Webber and Donahue,
2001). Similarity/attraction theory suggests that group members sharing similar values and
beliefs may do favorable things for in-group members and discrimination with out-group
members, which can be detrimental for group performance. There are some empirical
studies that reported the negative impact of gender and age diversity on group
performance (Fiske, 1993; Riordan and Shore, 1997).
Intergroup contact theory suggests the adverse effects of group diversity on group
performance are temporary. The theory reveals that with time, group members of a
workgroup get familiar with each other, which gradually reduces the in-group and out-group
bias (Pettigrew and Tropp, 2006). Some experimental studies support the positive link of
relation-oriented (for example, gender and age) diversity and group performance (Cox
et al., 1991; Watson et al., 1993).
Literature provides mix empirical evidence on the impact of relation-oriented features of
diversity on board performance. For example, Kim and Lim (2010) find that age-diverse
boards lead to improved financial performance. Hafsi and Turgut (2013) show that age
diversity weakens a firm’s social performance. Further, Carter et al. (2003) report a positive
relationship between gender diversity and firm value. However, Rose (2007) finds a
negative relationship between gender diversity and firm performance. Moreover, Sila et al.
(2016) find that female boardroom representation does not have a significant effect on firm
risk.
There are competing arguments on how relation-oriented board diversity can affect board
performance. On the one hand, empirical and theoretical background supports the
arguments that relation-oriented board diversity can hinder corporate performance, and on
the other hand, the literature suggests that in long-run relation-oriented board diversity
enhances group performance. Further, the evidence in social psychology field supports the
view that diversity leads to moderated decisions (Kogan and Wallach, 1966), and Jane
Lenard et al. (2014) suggest that gender diversity reduces the stock return volatility. Hence,

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we expect that relation-oriented diversity (age and gender) moderates corporate decisions
and reduce corporate risk. Thus, we develop the following hypothesis:
H1. Relation-oriented diversity is negatively associated with corporate risk.

2.2 Task-oriented board diversity

Task-oriented board diversity refers to the diverse workgroup with respect to task-oriented
characteristics such as education and tenure. Education diversity can be further described
as workgroup having diverse skilled/qualified groups, and tenure diversity can be
described as experienced related diverse workgroups. The task-oriented board diversity is
quantified into two dimensions – education diversity and tenure diversity.
Task-oriented diversity is more related to information processing and individuals’ work-
related capabilities than relation-oriented diversity (Pelled et al., 1999; Jackson et al., 1995).
Attributes of task-oriented diversity (i.e. experience and education) enhance a group’s
knowledge, skills and analytical capability. The empirical literature suggests that expert
board members positively affect board outcomes. Studies also show that expert board
members reduce earning management and increase quality financial reporting (Wang
et al., 2015; Cohen et al., 2014; Krishnan et al., 2011). Further, Bernile et al. (2018) also
show that diversity in boards reduces stock return volatility.
The expectations model (McGrath et al., 1995) suggests that task-oriented diversity can
have a positive impact on board performance. For example, board members having similar
expertise may cooperate, which will help them to enhance collective analytical capability
and skills, and therefore, they can deal effectively with complex problem-solving process.
Webber and Donahue (2001) find supportive evidence for the expectations model by
showing that cognitive diversity enhances effective decision-making. Further, Harjoto et al.
(2018) show that task-oriented board diversity reduces suboptimal investment.
Moreover, the evidence in social psychology studies supports the view that diversity leads
to moderated decisions (Kogan and Wallach, 1966). Our main argument, that is, task-
oriented diversity fosters moderation in board decisions is similar to the intuition of Adams
et al. (2005) that suggested that a firm’s risk increases with CEO power. They suggest that
sometimes powerful CEOs may make unchecked decisions that may lead to larger
idiosyncratic choices, which consequently leads to extreme outcomes and greater risk.
Similarly, we argue that homogeneity of board views, preferences and incentives of board
members would lead to idiosyncratic decisions because of less scrutiny within a firm’s
board. Thus, the lack of efficient internal governance would ultimately manifest in the form of
more volatile firm outcomes. Therefore, when board diversity is higher, there will be possibly
fewer volatile outcomes.
The preceding discussion suggests that task-oriented diverse board improves the monitory
and advisory role of the board, and therefore, moderate the board decisions and helps to
reduce corporate risk. Thus, we develop the following hypothesis:
H2. Task-oriented board diversity is negatively associated with corporate risk.

3. Sample and methodology

3.1 Sample selection
We selected a sample of all non-financial Chinese firms listed on the Shanghai and
Shenzhen stock markets considering the period 1998-2017. We considered Chinese firms
because of two reasons. First, as China is still an emerging economy, therefore, there is a
need to improve corporate governance mechanisms by suggesting governance codes.
Second, prior studies in the Chinese context (Liu et al., 2014; Saeed et al., 2016; Talavera
et al., 2018) have only considered one or two diversity attributes (especially gender),

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 without considering other diversity attributes such as tenure and education. Therefore, this
study considers four dimensions of diversity (age, education, tenure and gender) and
examines how they influence corporate risk.
We collected the data of all variables from the China Stock Market and Accounting
Research (CSMAR). We began our sample from 1999 by considering an extensive time-
period and availability of data on the CSMAR database. We selected our sample using the
following criteria. First, we excluded B share listed firms. We dropped missing data on
control variables. Our final data set is comprised of 12,721 firm-year observations of 1,579
non-financial listed firms. To avoid the influence of outliers, we have winsorized continuous
variables at 1 and 99 per cent level.

3.2 Methodology
We used the fixed-effect model to examine the impact of board diversity on corporate risk.
To control for heteroskedasticity in cross-sections, we apply robust standard error
regression. To test the association between board diversity and corporate risk across
different nature of ownership, we divided the sample into SOEs and NSOEs. To address the
endogeneity problem, we use a two-step generalized method of moments (GMM)
difference in the current study by following previous studies (Dang, 2011; Kashefi Pour and
Khansalar, 2015). To examine the relationship between board diversity and corporate risk,
we used the following regression equation (1):
X
RISKi;t ¼ b 0 þ b 1 DIVERSITYi;t þ b it Control þ ui;t (1)

Where, RISK refers to corporate risk, which is measured by the standard deviation of annual
stock returns; DIVERSITY refers to relation-oriented board diversity and task-oriented board
diversity; and Control refers to control variables. The control variables include DUALITY (a
dummy variable equalling 1 if the CEO and board chair are the same), BIND (the proportion
of independent directors on board), BSIZE (total number of directors on board), MB (market
to book ratio), TANG (fixed assets divided by total assets), LEV (total liabilities divided by
total assets) and PROF (Earnings before interest and taxes divided by total assets). Table I
provides variables descriptions.

3.3 Measurement of board diversity

We use Blau’s (2000) index of diversity to measure both relation-oriented and task-oriented
board diversity equation (2) as follows:

X
D ¼ 1 pi 2 (2)

Where D refers to the diversity index, p refers to the proportion of each category and i
represents the number of categories in an index. For example, if there are four categories
and each category has equal proportion, The index of diversity will be 0.75 [1 
(0.25^2 þ 0.25^2 þ 0.25^2 þ 0.25^2)]. More categories in the index result in a higher index
of diversity and vice versa. We compute the four diversity measures as follow:

1. Gender diversity (D_GENDER). It is calculated using two categories: male and female.
2. Age diversity (D_AGE). It is calculated using five categories: 40 and younger, 41-49,
50-59, 60-69 and 70 years and above.
3. Tenure diversity (D_TENURE). It is calculated using four categories: three years and
less, four years, five years and more than five years.

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 Table I Variables measurement
Variables Symbol Measurement

Dependent variable
Corporate risk RISK Three years rolling standard deviation of annual stock returns
Independent variables
P
Board diversity Board diversity variables are calculated using Blau’s index as: D = 1  pi2, where p is
the proportion of each category and i is the number of categories in the index
Gender diversity D_GENDER It is calculated using two categories, namely, male and female
Age diversity D_AGE It is calculated using five categories: 40 and younger, 41-49, 50-59, 60-69 and 70 years
of age and above
Education diversity D_EDUCATION It is calculated using five categories: 1 = Technical secondary school and below, 2 =
Associate degree, 3 = Bachelor, 4 = Master and 5 = PhD
Tenure diversity D_TENURE It is calculated using four categories: three years or less, four years, five years and more
than five years
Relation-oriented diversity D_RELATION The sum of gender diversity (D_GENDER) and age diversity (D_AGE)
Task-oriented diversity D_TASK The sum of education diversity (D_EDUCATION) and tenure diversity (D_TENURE)
Control variables
CEO duality DUALITY Dummy variable with value 1 if CEO is also chairman of board and 0 otherwise
Board independence BIND The ratio of independent directors to total members of the board
Board size BSIZE Total number of board of members in the board
Market to book ratio MB Market value of equity divided by book value of total assets
Tangibility TANG Fixed assets scaled by total assets
Leverage LEV Total liabilities divided by total assets
Profitability PROF Earnings before interest and taxes divided by total assets

4. Education diversity (D_EDUCATION). It is calculated using five categories: 1 =

Technical secondary school and below, 2 = Associate degree, 3 = Bachelor, 4 =
Master and 5 = PhD.
Following Harjoto et al. (2018), we calculate relation-oriented diversity (D_RELATION) by
adding gender diversity (D_GENDER) and age diversity (D_AGE). Further, we compute
task-oriented diversity (D_TASK) by adding tenure diversity (D_TENURE) and education
diversity (D_EDUCATION).

4. Empirical results
4.1 Descriptive statistics
Panel A of Table II reports descriptive statistics. The mean value of RISK is 0.70. The mean
value of D_RELATION is 0.855, indicating the relation-oriented diversity of Chinese firms.
The mean value of D_TASK is 0.89, showing task-oriented diversity. The mean value of
DUALITY is 0.136, suggesting that approximately 13 per cent of the CEOs are serving as
board chair. The mean value of BIND is 0.357, illustrating that approximately 35.7 per cent
are independent directors on board. The mean value of MB is 3.706, showing the market to
book ratio for the sample period. The mean value of TANG is 0.282, indicating that on
average, there are approximately 28.2 per cent fixed assets to total assets. The mean value
of LEV is 0.545, showing that Chinese firms hold a large portion of assets as liabilities. The
mean value of PROF is 0.071, showing an average profitability ratio over the sample period.
The mean value of BSIZE is 9.234, indicating that on average, there are nine directors on
board.
Panel B of Table II shows the frequency distribution of diversity variables. The age diversity
statistics suggest that 22.5 per cent of board members are 40 and less than 40 years of
age, 39.5 per cent of board of members are 41-49 years of age, 28.9 per cent of board
members are 50-59 years of age, 7.5 per cent of board members are 60-69 years of age,

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 Table II Descriptive statistics and frequency distribution of board diversity
Variables Observations Mean SD Minimum Maximum

Panel A. Descriptive statistics

RISK 12,721 0.707 0.576 0.001 8.426
D_RELATION 12,721 0.855 0.162 0.067 1.272
D_TASK 12,721 0.89 0.288 0.054 1.51
DUALITY 12,721 0.136 0.343 0 1
BIND 12,721 0.357 0.06 0 0.8
MB 12,721 3.706 3.09 0.77 16.796
TANG 12,721 0.282 0.183 0 0.956
LEV 12,721 0.545 0.178 0.12 0.94
PROF 12,721 0.071 0.073 0.627 0.815
BSIZE 12,721 9.234 1.916 3 19

Panel B. Frequency distribution of diversity variables

Age 40 and less 41-49 50-59 60-69 70 and above
(%) 22.5 39.5 28.9 7.5 1.6
Gender Male Female
(%) 85 15
Tenure Three years and less Four years Five years Above five years
(%) 24.6 53.4 5.3 16.7
Education Technical secondary school and below Associate degree Bachelor Master PhD
(%) 4.5 21.3 40.1 25.9 8.2
Notes: This table presents the descriptive statistics and frequency distribution of diversity variables. See Table I for variables definitions

1.6 per cent of board members are 70 and above 70 years of age. In terms of gender
diversity, the statistics show that approximately 85 per cent of the board members are male,
and hence, only a small portion is occupied by the women (15 per cent). The statistics of
tenure diversity shows that 24.6 per cent of the directors have 3 and less than 3 years
tenure, 53.4 per cent of the directors have 4 years tenure, 5.3 per cent of the directors have
5 years tenure and 16.7 per cent of the directors have above 5 years tenure. In terms of
education diversity, 4.5 per cent of the board members have technical secondary
education, and below, 21.3 per cent of the members have an associate degree, 40.1 per
cent of the board members have a bachelor degree, 25.9 per cent have a master degree
and 8.2 per cent of the directors have a Ph.D. degree. Overall, the statistics suggest that
Chinese firms are diversified largely in terms of tenure, education and age but less
diversified in terms of gender.

4.2 Effect of board diversity on corporate risk

Table III reports the results of the fixed-effect model. The coefficients on D_RELATION
(relation-oriented diversity) in Columns 1 and 3 are 0.135 and 0.183, respectively, which
are negative and statistically significant. These results support H1, suggesting that relation-
oriented diversity (gender and age) has a negative effect on corporate risk. Hence, H1 is
accepted. The negative relationship of relation-oriented diversity with corporate risk is also
statistically and economically significant. For example, the coefficient of D_RELATION in
Column 3 is 0.183, which means that a one-standard-deviation increase in relation-
oriented diversity decreases risk-taking by approximately 5.14 per cent points (0.183 
0.162/0.576).
Further, the coefficients of D_TASK (task-oriented diversity) in Columns 1 and 2 are 0.355
and 0.358, respectively, which are negative and statistically significant. This result is
consistent with H2, indicating that task-oriented diversity (tenure and education) reduces
corporate risk. Hence, H2 is accepted. The negative relationship of task-oriented board
diversity with corporate risk is also statistically and economically significant. For example,
the coefficient of D_TASK in Column 1 is 0.358, which illustrates that a one-standard-

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 Table III Effect of board diversity on corporate risk
Variables (1) (2) (3)

D_RELATION 0.135 (0.0748) 0.183 (0.0761)

D_TASK 0.355 (0.0269) 0.358 (0.0269)
DUALITY 0.000230 (0.0293) 0.00155 (0.0295) 0.000429 (0.0297)
BIND 0.828 (0.141) 0.821 (0.140) 0.686 (0.140)
MB 0.0226 (0.00250) 0.0226 (0.00250) 0.0231 (0.00256)
TANG 0.683 (0.0782) 0.677 (0.0781) 0.616 (0.0778)
LEV 0.266 (0.0785) 0.267 (0.0785) 0.255 (0.0783)
PROF 0.877 (0.125) 0.873 (0.124) 0.991 (0.125)
BSIZE 0.00460 (0.00671) 0.00483 (0.00672) 0.00324 (0.00676)
Constant 0.786 (0.125) 0.676 (0.108) 0.527 (0.124)
R2 0.075 0.075 0.049
Observations 12,721 12,721 12,721
Notes: This table presents the effect of board diversity on corporate risk. Figures in parenthesis are
robust standard errors. See Table I for variables definitions;  ,  ,  denote 1, 5 and 10% significance
level

deviation increase in task-oriented board diversity will decrease corporate risk by

approximately 17.9 per cent points (0.358  0.288/0.576). The magnitude of coefficients
suggests that task-oriented diversity is more effective than relation-oriented diversity in
reducing corporate risk.
For control variables, the results are consistent with prior studies (Adams and Ferreira,
2009; Harjoto et al., 2018; Liu et al., 2014; Zhang, 2012). Specifically, the results show
significant positive (negative) coefficients on MB, LEV and PROF (TANG and LEV).

4.3 Effect of board diversity on corporate risk in state-owned firms and non-state-
owned firms
The main difference between the Chinese economy and western economies is that Chinese
firms are significantly dominated by the state (Chen et al., 2019). Although the Chinese
Government has introduced several reforms and reduced state ownership, SOEs are still in
big number and have a big proportion in Chinese listed firms (Jebran et al., 2019). The
property rights theory argues that private ownership plays a significant role to make the
monitoring process of management performance effective and efficient (Alchian, 1965;
McCormick and Meiners, 1988). Thus, from the perspective of property rights theory, state
ownership can limit a firm’s performance. For example, SOEs are often viewed to enhance
social welfare, which may differ from the wealth maximization perspective. As SOEs and
NSOEs are one of the distinctive attributes of Chinese firms; we further test whether the
effect of board diversity on corporate risk varies across SOEs and NSOEs.
We further divided our sample into two sub-samples, i.e. SOEs and NSOEs. The results are
reported in Table IV. The results show significant negative coefficients on D_RELATION in
Columns 1 and 2 in the case of SOEs, whereas insignificant in the case of NSOEs.
Furthermore, the results show that the coefficients on D_TASK are significantly negative in
all cases. The results provide evidence that task-oriented diversity has a significant positive
effect on corporate risk for both SOEs and NSOEs.

4.4 Endogeneity problems

To address the endogeneity problem, we use a two-step GMM difference. Table V reports the
results of the two-step GMM model. AR (2) is found insignificant in all the three columns, which
shows that the model is not misspecified. We also found insignificant results for the Sargan test,
which indicates that our instruments are valid. As expected, the coefficients of D_RELATION are
significantly negative across all the columns. Further, the results show significant negative

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Table IV Effect of board diversity on corporate risk in SOEs and NSOEs
SOEs NSOEs
Variables (1) (2) (3) (4) (5) (6)

D_RELATION 0.149 (0.0860) 0.155 (0.0875) 0.0889 (0.146) 0.205 (0.151)

D_TASK 0.372 (0.0336) 0.372 (0.0335) 0.387 (0.0475) 0.392 (0.0488)
DUALITY 0.0224 (0.0360) 0.0257 (0.0365) 0.0237 (0.0361) 0.000809 (0.0454) 0.00258 (0.0464) 8.99e-05 (0.0459)
BIND 1.207 (0.241) 1.063 (0.239) 1.203 (0.241) 0.422 (0.229) 0.266 (0.235) 0.411 (0.230)
MB 0.0249 (0.00361) 0.0258 (0.00364) 0.0250 (0.00361) 0.0129 (0.00352) 0.0139 (0.00359) 0.0128 (0.00350)
TANG 0.643 (0.105) 0.560 (0.105) 0.642 (0.105) 0.693 (0.135) 0.623 (0.134) 0.687 (0.136)
LEV 0.414 (0.107) 0.381 (0.108) 0.413 (0.107) 0.0455 (0.121) 0.0623 (0.121) 0.0472 (0.121)
PROF 0.840 (0.184) 1.001 (0.186) 0.833 (0.184) 0.763 (0.159) 0.864 (0.159) 0.762 (0.159)
BSIZE 0.00677 (0.00850) 0.00469 (0.00871) 0.00717 (0.00848) 0.00984 (0.0134) 0.00860 (0.0133) 0.00966 (0.0133)
Constant 0.603 (0.152) 0.295 (0.156) 0.487 (0.144) 1.126 (0.261) 0.880 (0.257) 1.050 (0.204)
R2 0.080 0.049 0.079 0.063 0.035 0.063
Observations 7,305 7,305 7,305 5,416 5,416 5,416
Notes: This table presents the effect of board diversity on corporate risk for SOEs and NSOEs. Figures in parenthesis are robust standard errors. See Table I for variables definitions;
 
, and  denote 1, 5 and 10% significance level
 Table V Robustness test using two-step difference GMM
Full sample SOEs NSOEs
Variables (1) (2) (3)

L.RISK 0.664 (0.0178) 0.675 (0.0182) 0.650 (0.0221)

D_RELATION 1.708 (0.313) 1.004 (0.261) 1.240 (0.307)
D_TASK 0.737 (0.0560) 0.744 (0.0616) 0.719 (0.0677)
DUALITY 0.0403 (0.0388) 0.0265 (0.0445) 0.0475 (0.0470)
BIND 0.418 (0.245) 0.527 (0.250) 0.0689 (0.330)
MB 0.0187 (0.00334) 0.0220 (0.00421) 0.0108 (0.00384)
TANG 0.484 (0.118) 0.388 (0.122) 0.432 (0.157)
LEV 0.0428 (0.114) 0.120 (0.134) 0.0869 (0.127)
PROF 0.0740 (0.172) 0.0997 (0.247) 0.126 (0.152)
BSIZE 0.0117 (0.0113) 0.0112 (0.0109) 0.00692 (0.0167)
Observations 9,078 5,620 3,458
AR (1) 14.8 12.2 8.6
AR (2) 0.98 0.68 1.4
Sargan test (p-value) 0.25 0.15 0.77
Notes: This table presents the results of the two-step GMM model. Figures in parenthesis are robust
standard errors. See Table I for variables definitions;  ,  and  denote 1, 5 and 10% significance
level

coefficients on D_TASK in all columns. The findings suggest that the main results are consistent
across different natures of ownership, i.e. SOEs and NSOEs after controlling endogeneity
problems. Further, the coefficients indicate that both relation-oriented and task-oriented diversity
are important diversity attributes associated with corporate risk.

4.5 Discussion of results

We find that relation-oriented board diversity (D_RELATION) is negatively associated with
corporate risk. The results suggest that relation-oriented board diversity improves
performance by reducing corporate risk. Our findings are in line with our main hypothesis that
relation-oriented board diversity is an important attribute influencing corporate risk. Our results
support the findings of prior studies (Cox et al., 1991; Watson et al., 1993). Most importantly,
our findings are also consistent with intergroup contact theory, which suggests that adverse
effects of group diversity on group performance are temporary (Pettigrew and Tropp, 2006).
The findings also provide support to the uppers echelons theory, by showing that the TMT
diversity attributes may enhance board outcomes. Specifically, we show that TMT
heterogeneity may ultimately reduce corporate risk. Thus, our findings support the views of the
studies that show a positive outcome of TMT diversity (Barsade et al., 2000; Carpenter, 2002).
The results also show that task-oriented board diversity (D_TASK) reduces corporate risk-
taking. Our findings are consistent for SOEs and NSOEs after controlling for endogeneity
problems. Our results are consistent with the notion that task-oriented board diversity
improves board outcomes (Talavera et al., 2018) and ultimately reduce corporate risk.
Further, the results are consistent with the expectation model (McGrath et al., 1995).
Further, the magnitude of coefficients suggests that task-oriented board diversity is more
effective in reducing corporate risk.
Overall, the results illustrate that policymakers and top management should focus on the
enhancement of both, task-oriented and relation-oriented diversity attributes, which can
ultimately make a board’s advisory and monitoring role effective and efficient.

5. Conclusion
This study investigates the impact of board diversity on corporate risk. The board diversity
attributes are quantified into task-oriented diversity (tenure and education) and relation-

VOL. 20 NO. 2 2020 j CORPORATE GOVERNANCE j PAGE 289

 oriented diversity (age and gender). The findings show that both task-oriented and relation-
oriented diversities are associated with corporate risk. The results indicate that board
diversity improves efficiency and performance and thereby reduce corporate risk. These
conclusions are consistent after controlling for endogeneity issues.
Our findings have several implications. First, in terms of corporate governance research,
our findings provide valuable insights that board diversity is an important attribute of
corporate boards, which has been overlooked in the literature. While prior studies
(Arena et al., 2015; Ayadi et al., 2015; Benkraiem et al., 2017; Ullah et al., 2019; Kyaw
et al., 2017; Lin et al., 2018; Zhang, 2012) have mostly based their arguments
considering only a single facet (mostly – gender) of board diversity, we step forward and
suggest that a board may consist of diverse attributes such as relation-oriented
attributes (age and gender) and task-oriented attributes (tenure and education).
Considering two important dimensions of board diversity, we show how a diverse board
reduces corporate risk-taking. Thus, our findings elaborate that regulators may consider
overall board diversity an important factor influencing the risk-taking behavior of firms.
Second, our findings provide implications for shareholders by specifically focusing on
the composition of a firm’s board. We suggest that shareholders may consider several
dimensions of board diversity important for corporate decisions. Third, our findings
suggest that the effect of board diversity on corporate risk remains the same across
firms of different nature – SOEs and NSOEs. This indicates that board diversity plays an
important role to reduce corporate risk regardless of the nature of the enterprise. Fourth,
our study shows that diversity in terms of gender, tenure, education and age are all
important attributes, however, our findings elaborate that tenure and education
diversities are comparatively more influential in alleviating corporate risk, compared to
gender and age diversities. Therefore, corporate managers should consider that
directors’education and tenure attributes are much important for reducing corporate
risk. Finally, our findings suggest that policymakers and corporate managers should
devise strategies by focusing on the overall board diversity, which may ultimately
influence board outcomes.

Acknowledgement
We acknowledge two limitations. First, this study tests the assumptions in an emerging
market setting, and possibly the results can be different in other economies. Second,
although this study used four different dimensions of diversity but excludes other
dimensions.
We also provide future research directions. First, as this study tested the hypothesis in an
emerging market setting, China, and it is obvious that the Chinese economy varies from
other economies in terms of culture and institutions setting. Therefore, future research can
consider a large sample from other developed and emerging countries, especially, Western
economies that have a distinct culture and setting. Second, this study considers only four
diversity attributes, and future research work can consider other attributes such as race and
ethnicity.

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Corresponding author
Khalil Jebran can be contacted at: [email protected]

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