BOARD DIVERSITY AND ITS IMPACT ON FIRM PERFORMANCE: EMPIRICAL EVIDENCE FROM LISTED COMPANIES IN SRI LANKA

Abstract

Board diversity is a key indicator of board quality and it is one of the global trends in the world according to researchers done by various scholars and professional organizations. Board diversity means having a range of many people that are different from each other with considering factors like age, race, gender, educational background and professional qualifications. Diversity in board of directors is playing a critical role in firm performance. Previous literature on diversity typically follows two general distinctions; the observable (demographic) distinction and the non-observable (cognitive) distinction. The results of the research on Board diversity and Performance is inconclusive and there is a dearth of studies related to the board diversity and performance. Therefore, this research tries to bridge this empirical gap by examining the impact of board diversity on the firm performance of the 100 companies listed in Colombo Stock Exchange (CSE) for the years 2017 and 2018 based on highest market capitalization as at 30th June 2018. The level of board diversity which is the independent variable is measured by the gender, number of independent directors, professional qualifications, and level of education, percentage of minority shareholders and shares of minority shareholders and the level of financial performance which is the dependent variable is measured by Return on Assets (ROA), Return on Equity (ROE) and Tobin’s Q. The archival data was collected from the annual reports for the two-year period. The analysis for this study is conducted using descriptive statistics, correlation analysis and multiple regression analysis after checking the assumptions. Findings of this study pointed out that there is a significant positive impact of independent directors, female directors, professional qualification, education level, percentage of minority shareholders, shares of minority shareholders on firm performance. Since the board of directors with diversity tend to increase firm performance. Therefore, it should be encouraging the formation of boards with more diversified members. The present study will contribute to the existing body of knowledge on the relationships between Board Diversity and Firms in Sri Lankan firms based on Agency theory and Resource Dependency theory.