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

Shahid Ali; Shoukat Ali; Junfeng Jiang; Martina Hedvicakova; Ghulam Murtaza

doi:10.3389/fpsyg.2022.976345

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

Front Psychol. 2022 Sep 14:13:976345. doi: 10.3389/fpsyg.2022.976345. eCollection 2022.

Authors

Shahid Ali¹, Shoukat Ali², Junfeng Jiang¹, Martina Hedvicakova³, Ghulam Murtaza²

Affiliations

¹ School of Management Science and Engineering, Nanjing University of Information Science and Technology, Nanjing, Jiangsu, China.
² Department of Commerce, The Islamia University of Bahawalpur, Bahawalpur, Punjab, Pakistan.
³ Department of Economics, Faculty of Informatics and Management, University of Hradec Králové, Hradec Králové, Czechia.

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.

Keywords: China; Non-State-Owned Enterprises; State-Owned Enterprises; board diversity; financial distress.