Directors’ Diversity and the Economic Value of Equity

Abstract

The paper examines the effect of directors’ demographic and cognitive diversity on the economic value of equity based on longitudinal data from the top 15 Deposit Money Banks (DMBs) in Nigeria. The study finds steadily robust evidence that shows foreign and female directors at critical mass representation positively influence banks’ net worth (a proxy of the economic value of equity). Contrary to the hypothesis, the result of cognitive diversity was rather inconclusive due to the diverse direction of causality. While the effect of directors with Bachelor of Law degrees and industry experience shows a significant negative effect, the impact of directors with business-related degrees though positively linked to the economic value of equity but remained statistically insignificant. With average sampled directors having over 23 years of industry experience, the study concluded that excessive industry knowledge is injurious to financial performance. This is because these directors are perhaps more cautious about their reputation and thus are likely to exhibit diminishing marginal utility for wealth maximization.