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Board Diversity and Financial Reporting Quality

The diversity of boards of directors (or lack of thereof) is currently attracting significant attention from regulators and institutional investors all over the world, with some jurisdictions either imposing conditions (e.g., quotas on gender diversity) or requesting disclosure of measures taken to enhance diversity. Diversity is seen as providing boards with access to a wider pool of competencies, experiences and perspectives, which should be beneficial to board effectiveness. In this study, we investigate how a firm’s financial reporting quality relates to two dimensions of board diversity: geography and gender. Geographical diversity reflects directors’ geographical location relative to corporate headquarters. Our results show that financial reporting quality, as measured by the level of abnormal accruals and restatements, is lower for firms with independent directors who are geographically spread out than for firms with less geographically diverse boards. In addition, firms with more geographic diversified audit committee members have lower financial reporting quality. Moreover, we do not find any significant relationship between board gender diversity and financial reporting quality. Our findings hold after controlling for endogeneity and also alternate explanations. These findings suggest that firm-specific effects from board diversity do differ and are conditional upon the facet of the diversity being considered. Our results also indicate that regulators may need to take a more comprehensive approach if they push for board diversity.
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