Board diversity and corporate innovation

This paper aims to investigate the effect of board diversity on corporate innovation. We classify board diversity into two aspects based on the demographical features of directors (inherent diversity) and traits that directors gain from training and experience (acquired diversity). We hypothesize that the effect of inherent board diversity on corporate innovation is less clear, while the effect of acquired board diversity on innovation is positive. We develop three composite board diversity measures, i.e., inherent diversity, acquired diversity, and aggregated diversity, to capture the diversity among board members. Our results indicate that board diversity is positively and significantly associated with a firms’ innovation. Specifically, inherent board diversity is positively associated with innovation output (measured by patents and citations). Acquired board diversity and aggregated board diversity are significantly and positively associated with innovation factors, including R&D expenses, patents, citations, and the innovation output per dollar of R&D capital. Our results hold after addressing endogeneity issues and reverse causality concerns. We also find that board diversity has a stronger effect on innovation when a firm is in a competitive industry and when the CEO has high equity ownership.