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Does foreign institutional ownership mediate the nexus between board diversity and the risk of financial distress? A case of an emerging economy of China

Author

Listed:
  • Shoukat Ali

    (The University of Lahore
    The Islamia University of Bahawalpur)

  • Ramiz ur Rehman

    (The University of Lahore
    Sohar University)

  • Wang Yuan

    (Xi’an Polytechnic University)

  • Muhammad Ishfaq Ahmad

    (The University of Lahore)

  • Rizwan Ali

    (The University of Lahore)

Abstract

The study aims to empirically analyze the effect of board diversity measurement in demographic diversity (i.e., age, gender, and nationality) and cognitive diversity (i.e., education, financial expertise, and tenure) dimensions on the probability of financial distress in an emerging market, China. Additionally, evaluate whether foreign institutional ownership mediates between board diversity and financial distress nexus. Distinctly, the fixed-effects of panel regression method are employed to examine a sample of 13,740 firm-year observations covered from 2009 to 2018. The study reveals that board diversity reduces financial distress likelihood, and foreign institutional ownership mediates this relationship. Further, applied two-stage GMM to resolve the possible endogenous problem, and the robust models also verified the results. First, the study findings contribute particularly in the Chinese context that board diversity is positively associated with financial distress, suggesting that diverse boards are helpful to reduce financial distress likelihood. Second, foreign ownership is attracted through the improved board diversity. Third, foreign ownership has a substantial impact on shaping the board diversity’s effect on the likelihood of financial distress. The study findings are novel and imply that firms having diverse boards attract foreign institutional ownership by reducing asymmetric information. Subsequently, foreign institutional investors are helping to reduce financial distress likelihood.

Suggested Citation

  • Shoukat Ali & Ramiz ur Rehman & Wang Yuan & Muhammad Ishfaq Ahmad & Rizwan Ali, 2022. "Does foreign institutional ownership mediate the nexus between board diversity and the risk of financial distress? A case of an emerging economy of China," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 12(3), pages 553-581, September.
    • Handle: RePEc:spr:eurasi:v:12:y:2022:i:3:d:10.1007_s40821-021-00191-z
    DOI: 10.1007/s40821-021-00191-z
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    More about this item

    Keywords

    Board diversity; Financial distress; Foreign institutional ownership;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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