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The Economics of Director Heterogeneity


  • We would like to thank an anonymous reviewer, Steve Balsam, Zhouhui Chen, Jay Choi, Elyas Elyasiani, Ken Kopecky, Robin Lumsdaine, Ram Mudambi, and Lalitha Naveen for very helpful comments and suggestions.


We investigate the potential costs and benefits of firms constituting a heterogeneous pool of directors relative to more homogeneous boards. We measure director heterogeneity along six separate dimensions and divide board heterogeneity into occupational and social components. Our empirical analysis indicates that corporate complexity and managerial control exhibit significant influence on board heterogeneity. Using the heterogeneity of the county population of the firm's headquarters as an instrument, we also find that investors place valuation premiums on heterogeneous boards in complex firms but discount heterogeneity in less complex firms. Overall, our analysis indicates greater heterogeneity may not necessarily improve board efficacy.