Beneath the surface of the corporation: Board diversity, firm ownership, firm technology, and corporate risk management

Abstract

The research project entitled “Beneath the surface of the corporation: Board diversity, firm ownership, firm technology, and corporate risk management,” comprises three empirical investigations. The first one investigates the role of Artificial Intelligence (AI) on U.S. firms’ resilience to the COVID-19 crisis. We show that firms adopting any AI technology pre-crisis (i.e., AI adopters) exhibited higher stock returns during the peak of the crisis than non-AI adopters. This cross-sectional finding holds in a Difference-in-Differences setting. Our main findings are driven by the acquisition of AI patents. We provide evidence that heterogeneity in AI adoption matters, as the following AI technologies drive our results: machine learning, natural language processing, and virtual assistants. Moreover, AI adopters exhibited lower stock volatility during the crisis’ peak than non-AI adopters. AI adoption’s resilience is also reflected in other firm indicators, such as operating performance and firm valuation. Finally, we find that firm ownership does not seem to moderate the relationship between AI adoption and firm performance. The subsequent investigation examines other key aspects and dynamics that lie ‘beneath the surface of the corporation’, notably the effect of foreign ownership on board cultural diversity. Using detailed hand-collected data on firm ownership and board cultural diversity from Sweden, we find that foreign ownership is positively associated with board cultural diversity. This relationship is not an artifact of foreign owners joining the board, nor do firms with substantial foreign focus drive it. The presence of foreign owners on nomination committees seems to be the channel through which foreign owners implement cultural diversity. The positive relationship between foreign ownership and board cultural diversity is also more pronounced in firms where owners may have more influence (i.e., family firms, dual-class share firms, and firms with concentrated ownership). However, we do not find evidence that cultural diversity increases firm value or is correlated with other types of diversity (i.e., gender, board independence, board tenure, and directors’ qualifications). Our preferred interpretation is “quasi-homophily.” The third research studies the relationship between board cultural diversity and hedging using two detailed hand-collected datasets on directors’ nationalities and financial derivatives from Sweden. The sample comprises 18,722 director firm-year observations, with directors representing 37 countries. I show that board cultural diversity is positively associated with the decision to hedge any risk type (i.e., interest rate, foreign exchange rate, and commodity price), the hedging intensity, and the use of non-linear derivative instruments (i.e., options or optionalities). My analysis further reveals strong evidence that deploying derivative instruments for hedging purposes, driven by culturally diverse boards, translates into higher firm performance. Additional analyses show that there is an industry heterogeneity in using financial derivatives for hedging, and that differences in the power distance and uncertainty avoidance of Hofstede’s cultural dimensions within the board of directors primarily drive the results. Overall, the findings are consistent with the relevant theories and literature on corporate hedging.