International Business Review 28 (2019) 101600

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International Business Review

journal homepage: www.elsevier.com/locate/ibusrev

Board diversity and firm performance: The role of business group affiliation T
a,⁎ b b,c,1
Raj Aggarwal , Varun Jindal , Rama Seth
a
Foundation Board, Kent State University, Kent, OH, USA
b
Finance and Control Group, Indian Institute of Management Calcutta, Kolkata, India
c
Department of Finance, Copenhagen Business School, Copenhagen, Denmark

A R T I C LE I N FO A B S T R A C T

Keywords: There is little consensus globally on the relationship between board diversity and firm performance. Using the
Board diversity resource dependence and agency views, this paper examines how business group affiliation influences the re-
Business groups lationship between board diversity and firm performance as a contextual/confounding factor. Based on data for
Corporate governance listed firms in India, we find that board demographic diversity is positively associated with the firm performance
India
(Tobin’s Q) of standalone firms, but this association is negative for group-affiliated firms. This negative effect of
Institutional structure
Mergers and acquisitions (M&A)
group affiliation is confirmed in a test based on a novel measure of firm performance using the stock market
reaction to the announcement of mergers and acquisitions. For both measures of performance, we show that
business group affiliation impairs the positive firm value effects of board demographic diversity. These findings
imply that the relationship between board diversity and firm performance requires re-examination in the many
countries where group affiliation is common. Our results also provide evidence of a new cost of group affiliation
and show in a fresh context that cross-country studies should account for international variations in ownership
and institutional structures.

1. Introduction
The board of directors of a firm, often referred to as the board, is its
highest decision-making and supervisory body. The literature enumer-
ates two major authoritative views on the functioning of corporate
boards: the agency view and the resource dependence view. The agency
view documents that a board performs a monitoring role and helps to
discipline self-interested managers (Fama & Jensen, 1983; Hart, 1995;
Jensen & Meckling, 1976). Following the agency view, structurally
more diverse boards that have an adequate number of independent
directors should be able to monitor managers optimally. The resource
dependence view, on the other hand, proposes that a board performs an
advisory and a counseling role (Pfeffer & Salancik, 1978). Demo-
graphically more diverse boards, in line with the resource dependence
view, are expected to have higher quality resources at their disposal to
better advise management (Anderson, Reeb, Upadhyay, & Zhao, 2011;
Ben-Amar, Francoeur, Hafsi, & Labelle, 2013). Following the agency
and resource dependence views, it may be argued that structurally and
demographically more diverse boards are likely to have superior
monitoring and advisory capabilities, and should, therefore, improve
firm performance.
Even though theoretical considerations based on the agency and
resource dependence views indicate that diversity in the board of di-
rectors enhances firm performance, empirical evidence has failed to
arrive at a consensus to support this theory. While some studies report a
positive effect, several others report a negative or no significant effect
of board diversity on firm performance (Adams, de Haan, Terjesen, &
van Ees, 2015; Miller & Triana, 2009; Post & Byron, 2015; Tasheva &
Hillman, 2018). The deviation of the empirical results from the theo-
retical predictions calls for examining the contextual idiosyncrasies or
confounding factors that are likely to shape the diversity-performance
relationship (Post & Byron, 2015). Our study addresses this significant
research gap by hypothesizing that business group affiliation is an im-
portant contextual factor, which if ignored can potentially contaminate
the board diversity–firm performance relationship.
Prior studies largely ignore the role of business groups in influen-
cing the diversity-performance relationship in markets with the pre-
sence of such group structures (see, for examples, Ahern and Dittmar
(2012), Bennouri, Chtioui, Nagati, and Nekhili (2018), and Campbell
and Mínguez-Vera (2008)). The board structure of group-affiliated
firms is likely to be different compared to standalone firms because
group-affiliated firms often have director interlocking arrangements
with other firms from the same group often with a large numbers of
family or group members serving as directors (Khanna & Rivkin, 2000,

⁎
Corresponding author.
E-mail addresses: aggarwa@uakron.edu, profraggarwal@gmail.com (R. Aggarwal), varunj14@iimcal.ac.in (V. Jindal), rs.fi@cbs.dk (R. Seth).
1
Rama Seth in on leave from the Indian Institute of Management Calcutta.

https://doi.org/10.1016/j.ibusrev.2019.101600
Received 14 December 2018; Received in revised form 6 July 2019; Accepted 24 July 2019
Available online 07 August 2019
0969-5931/ © 2019 Elsevier Ltd. All rights reserved.
R. Aggarwal, et al.
2001, 2006; Silva, Majluf, & Paredes, 2006). Further, unlike in stan-
dalone firms, the business group family members serving on boards of
group-affiliated firms are more likely to represent group goals rather
than individual firm goals (Strange, Filatotchev, Buck, & Wright, 2009).
Therefore, the failure to recognize the heterogeneity in the board
structure between standalone and group-affiliated firms can potentially
result in drawing erroneous conclusions about the effect of board di-
versity on firm performance in markets with business groups.
Our study considers two broad forms of diversity in the board of
directors: demographic diversity that is based on the demographic
characteristics of the board members such as gender, educational
qualifications, age, and tenure, and structural diversity that is based on
the independence status of board members. We argue that interlocking
of directors with goal conflicts within business groups is especially
likely to reduce the demographic diversity in the board of directors at
affiliated firms in spirit (de facto) but not necessarily in letter (de jure),
and it is, therefore, unlikely to produce similar benefits that standalone
firms can reap from similarly diverse boards. Further, if director in-
terlocking within business groups is inappropriately used to tunnel or
transfer profits across groups firms, demographic diversity may nega-
tively influence the performance of affiliated firms. Structural diversity,
on the other hand, is unlikely to be affected by the director interlocking
of family members as regulations generally prohibit the appointment of
family members in the independent director positions.
We propose that the effect of board diversity on measures of firm
performance is not uniform for all firms. Taking into account the nature
of heterogeneity in board composition between group-affiliated and
standalone firms and using agency and resource dependent views on
the functioning of boards, we contend that business group affiliation
likely impairs the positive effects of board demographic diversity, while
the effect of structural diversity is little affected. Thus, unlike prior
literature, our paper attempts to address the important research gap on
the role of business groups in the board diversity–firm performance
relationship.
In addition to addressing the aforementioned research gap, our
study makes several refinements to the current state of the literature on
board diversity. First, unlike most of the empirical studies in prior lit-
erature, we do not confine ourselves to merely examining the influence
of board gender diversity on firm performance, rather we extend the
diversity discussion to take into account other observable demographic
aspects of board members such as their educational qualifications, age,
and tenure as well. Second, the usual measures of firm performance are
somewhat subjective and may not be directly linked to board compo-
sition (Green & Homroy, 2018). To highlight and add further to the
value of our research findings, we additionally identify and use a novel
performance measure rarely used in other board diversity studies – the
market-based M&A outcome that is directly influenced by board deci-
sions and reflects non-subjective market assessments.2 Finally, unlike
most of the prior studies, we do not use simple proportions or percen-
tages as diversity measures, rather we use measures such as Blau index
(for discrete attributes) and the coefficient of variation (for continuous
attributes) that are real measures of diversity (Harrison & Klein, 2007).
We base our analysis of board diversity-performance relationship on
a sample of firms constituting the NIFTY 500 index in India using fi-
nancial statement and board composition data over the ten-year period
starting from April 1, 2006 (starting FY06) to March 31, 2015 (ending
FY15).3 Our tests are based on two different measures of performance,
general performance measured by Tobin’s Q and special performance
measured by the stock market reactions around M&A deal announce-
ments by acquiring firms. The results from these tests indicate that
2
Ben-Amar et al. (2013) and Levi, Li, and Zhang, (2014)) are some of the rare
studies that examine the role of board diversity on firms’ strategic decisions
such as M&As.
3
FY stands for financial year.
2
International Business Review 28 (2019) 101600
business group affiliation impairs the positive firm value effects of de-
mographic board diversity in their affiliated firms, but the performance
effects of structural diversity remain relatively unaffected. These re-
sults, are also evidence of a previously undocumented cost of business
group affiliation, and also show in a fresh context that cross-country
studies should account for international differences in ownership and
institutional structures such as the prevalence of business groups.
The rest of the paper is organized as follows: In Section 2, we review
the existing literature and develop our framework as well as hy-
potheses. In Section 3, we describe the empirical context of our study as
well as our data, variables, and methodology. In Section 4, we report
our results. In Section 5, we discuss the theoretical contributions of our
paper, its limitations, and some avenues for future research. We con-
clude in Section 6.
2. Literature review and hypotheses development
Research and scholarship on board diversity has been one of the
most prolific topics in the last decade or so. Prior research on the di-
versity of the board of directors differentiates between its demographic
and structural diversity. While the demographic diversity of a board is
linked with gender, culture, nationality, and experience of its directors,
structural diversity is usually linked to the board independence (Ararat,
Aksu, & Cetin, 2015; Tasheva & Hillman, 2018). Since board in-
dependence is either mandated through various regulations or sug-
gested for adoption through best practices, structural diversity has also
been termed as statutory diversity in the literature (Ben-Amar et al.,
2013).
Board diversity comes with several benefits as well as costs. There
can be numerous gains from diversity in the board of directors. First,
diversity fosters creativity and innovation by considering a great
variety of perspectives (Carter, Simkins, & Simpson, 2003; Robinson &
Dechant, 1997). A more diverse board is likely to be more informative,
has better information processing capabilities, and can potentially make
better decisions (Adams et al., 2015; Tasheva & Hillman, 2018).
Second, diversity fosters independence of thought process in the
boardroom and can potentially result in better monitoring by the board
(Adams & Ferreira, 2009; Adams et al., 2015). Third, diversity helps to
better understand a firm’s marketplace consisting of its prospective
customers as well as suppliers and can, therefore, improve a firm’s
market penetration ability (Carter et al., 2003; Robinson & Dechant,
1997). Finally, diversity in culture promotes sensitivity towards dif-
ferent cultures for a firm and can also foster better employee and global
relationships (Carter et al., 2003; Robinson & Dechant, 1997).
Board diversity does have some costs too. During periods of en-
vironmental turbulence, such as those of financial crises, more diverse
boards could be less likely to initiate strategic changes because such
changes may intensify differences among the board members
(Goodstein, Gautam, & Boeker, 1994). Additionally, demographic dif-
ferences among the board members may sometimes create frictions
which, if not mitigated, may affect the performance of a board (Veltrop,
Hermes, Postma, & de Haan, 2015).
2.1. Board diversity and firm performance
The composition including diversity of a firm’s board can influence
its functioning, which in turn can influence its performance (Aggarwal
& Dow, 2012; Carter, D’Souza, Simkins, & Simpson, 2010; Isidro &
Sobral, 2015; Kim, Burns, & Prescott, 2009). We systematically review
the literature on the performance effects of board diversity in several
disciplines including management, finance, accounting, and economics
over the last 15 years or so. We summarize the findings from this lit-
erature review in Table 1 and document below some important insights
that we gather from synthesizing prior literature.
First, the prior literature fails to arrive at a consensus on whether
diversity in the board of directors has a positive, negative, or negligible
 Table 1
Summary of studies on performance effects of board-level diversity.
Author(s) Dominant role of Performance measure Diversity measure Sample and time Key findings Journal
diverse boards period
R. Aggarwal, et al.

Carter et al. (2003) Monitoring Stock-based measure (Tobin's Q) Percentage of females or minorities on US firms (1997) The proportion of women or minorities on the The Financial Review
the board boards has a positive association with firm
financial value.
Erhardt et al. (2003) Monitoring Accounting-based measures (return on Percentage of females and minorities on US firms There is a positive association between board Corporate Governance:
assets and return on investment) the board (1993–1998) demographic diversity as measured by the An International Review
proportion of women and minorities on the board
and firm financial performance.
Campbell and Monitoring Stock-based measure (Tobin's Q) Percentage of female directors on the Spanish firms There is a positive relationship between board Journal of Business
Mínguez-Vera board, Blau and Shannon indices of (1995–2000) gender diversity and firm value. Ethics
(2008) female representation on the board
Adams and Ferreira Monitoring Stock-based measure (Tobin's Q) and Percentage of female directors on the US firms The association of gender diversity with firm Journal of Financial
(2009) accounting-based measure (return on board (1996–2003) performance is positive only for weakly governed Economics
assets) firms because of possibly better monitoring by
female directors. The relationship between gender
diversity and firm performance turns negative for
already well-governed firms.
Carter et al. (2010) Monitoring, advisory, Stock-based measure (Tobin's Q) and Number of female and minority directors US firms The study fails to find any link between minority Corporate Governance:
and compliance with accounting-based measure (return on on the board and various committees (1998–2002) or ethnic diversity and firm performance. The An International Review
regulations assets) results are attributed to the contingency view that
some aspects of board diversity may be valuable to
only some organizations and that too under certain
circumstances.
Haslam et al. (2010) Not highlighted Stock-based measure (Tobin's Q) and Percentage of female directors on the UK firms Board-level gender diversity has a negative British Journal of
accounting-based measures (return on board (2001–2005) association with stock-based performance and no Management

3
assets, return on equity) association with accounting-based measures of
performance.
Srinidhi et al. (2011) Monitoring Earnings quality Existence of female directors (presence of US firms Female participation on the boards of firms Contemporary
at least one female director) on the board (2001–2007) increases the earnings quality of such firms Accounting Research
through improved board oversight.
Gul et al. (2011) Monitoring Stock price informativeness Number and percentage of female US firms Firms with gender-diverse boards exhibit higher Journal of Accounting
directors on the board, existence of (2001–2006) stock price informativeness, and this relationship and Economics
female directors (presence of at least one becomes stronger for weakly governed firms.
female director) on the board
Ben-Amar et al. Advisory and Mergers and acquisitions (M&A) Classification of gender, nationality, Canadian firms Demographic diversity as measured by gender, British Journal of
(2013) monitoring performance (abnormal returns around experience, and culture diversity (2000–2007) nationality, experience, and culture of the board Management
M&A announcements) attributes into terciles members has a non-linear impact on shareholder
wealth around M&A deal announcements.
Structural diversity, on the other hand, has little
influence on M&A performance.
Gregory-Smith et al. Not highlighted Stock-based measures (total shareholder Percentage of female directors on the UK firms The study fails to find any association between The Economic Journal
(2014) return, Tobin's Q) and accounting-based board (1996–2011) gender diversity and a wider range of corporate
measures (return on assets and return on performance measures.
equity)
Chapple and Not highlighted Stock-based measure (portfolio Number of female directors on the board Australian firms The study examines the financial impact of board- Journal of Business
Humphrey (2014) approach) (2004–2011) level gender diversity in a self-regulated Ethics
environment by taking a market-level view of
financial performance using both one-factor and
four-factor models, and they find no difference in
the performance of all-male and gender-diverse
board structures.
Ali et al. (2014) Advisory Employee productivity and return on Gender diversity based on the Blau index Australian firms There is a positive and linear association between Journal of Business
assets and age diversity based on the coefficient (2012) gender diversity and employee productivity and a Ethics
of variation
(continued on next page)
International Business Review 28 (2019) 101600
 Table 1 (continued)

Author(s) Dominant role of Performance measure Diversity measure Sample and time Key findings Journal
diverse boards period
R. Aggarwal, et al.

negative but inverted U-shaped link between age

diversity and return on assets.
Ararat et al. (2015) Monitoring Stock-based measure (Market-to-book) Blau indices for gender, age, education, Turkish firms Board-level demographic diversity exhibits a Corporate Governance:
and accounting-based measure (return and nationality of the board of directors (2006) positive association with measures of firm An International Review
on equity) performance, and monitoring by the board
mediates this relationship.
Arun et al. (2015) Monitoring and Earnings management (current Number of female directors on the board UK firms Gender-diverse boards follow more conservative International Review of
ethical discretionary accruals) (2005–2011) accounting practices and engage in a lesser degree Financial Analysis
of earnings management.
Lai et al. (2017) Monitoring Audit quality (audit fees and auditor Existence of female directors (presence of US firms Gender-diverse boards demand higher audit Contemporary
choice) at least one female director) on the board (2001–2011) quality relative to all-male boards. Accounting Research
and audit committee
Ahmed and Ali (2017) Monitoring Stock liquidity (Amihud illiquidity Percentage of female directors on the Australian firms There is a positive association between the Journal of Contemporary
estimate, liquidity ratio, and stock board (2008–2013) presence of female directors and stock liquidity, Accounting and
turnover) one of the indicators of efficient capital market Economics
pricing and lower cost of capital.
Conyon and He (2017) Not highlighted Stock-based measure (Tobin's Q) and Percentage of female directors on the US firms The study documents a positive but heterogeneous Journal of Business
accounting-based measure (return on board (2007–2014) relationship between gender diversity and firm Research
assets) performance using the quantile regression
approach. In particular, it shows that gender
diversity has a higher positive impact in case of
high-performing firms than the low-performing
ones for a sample of US firms.
Saeed and Sameer Monitoring Dividend payments (dividend payout Percentage of female directors on the Indian, Chinese and Gender diversity has a negative relation with International Business
(2017) ratio and dividend yield) board Russian firms dividend payments. Review

4
(2007–2014)
Talavera et al. (2018) Monitoring and Bank profitability (return on assets, Coefficient of variation of the age of Chinese banks Age diversity of board members has a negative International Review of
advisory return on equity, net interest margin, directors on the board (2009–2013) association with bank profitability. Financial Analysis
and pre-provision profit ratio) and risk
(Z-score)
Liu (2018) Monitoring, advisory, Corporate environmental misconduct Percentage of female directors on the US firms Gender-diverse boards are associated with lesser Journal of Corporate
and ethical (environmental lawsuits) board, presence of female CEO (2000–2015) environmental litigation. Finance
Wahid (2018) Monitoring Financial manipulation (restatements) Existence of female directors (presence of US firms Gender-diverse boards exhibit a lower incidence of Journal of Business
at least one female director) on the board (2000–2010) financial manipulation for weakly as well as Ethics
strongly governed firms.
García-Sánchez et al. Monitoring Impression management in Percentage of female directors on the Firms from 12 Gender-diverse boards decrease the impression International Business
(2019) sustainability reporting (balance, board, Blau index for gender countries management in sustainability disclosure. Review
conciseness, clarity, comparability, and (2006–2014)
reliability)
International Business Review 28 (2019) 101600
R. Aggarwal, et al. International Business Review 28 (2019) 101600

effect on different firm performance measures and quality indicators. these traditional measures and has also looked at other performance
Some studies document a positive effect (Ahmed & Ali, 2017; Ararat measures such as earnings quality (Arun et al., 2015; Lai et al., 2017),
et al., 2015; Arun, Almahrog, & Ali Aribi, 2015; Campbell & Mínguez- audit quality (Lai et al., 2017), stock liquidity (Ahmed & Ali, 2017),
Vera, 2008; Carter et al., 2003; Conyon & He, 2017; Erhardt, Werbel, & dividend payments (Saeed & Sameer, 2017), financial manipulation
Shrader, 2003; Gul, Srinidhi, & Ng, 2011; Lai, Srinidhi, Gul, & Tsui, (Wahid, 2018), impression management in sustainability reporting
2017; Srinidhi, Gul, & Tsui, 2011; Wahid, 2018), some others document (García-Sánchez, Suárez-Fernández, & Martínez-Ferrero, 2019), and
a negative effect (Ahern & Dittmar, 2012; Haslam, Ryan, Kulich, corporate environmental misconduct (Liu, 2018).
Trojanowski, & Atkins, 2010; Talavera, Yin, & Zhang, 2018) and a few
others find no significant effect (Carter et al., 2010; Chapple &
2.2. Business groups and firm performance
Humphrey, 2014; Gregory-Smith, Main, & O’Reilly, 2014) on varied
measures of firm performance and quality. In order to reconcile these
Business groups represent sets of legally independent firms inter-
differences in findings, it may, therefore, be important to take into
linked with common insider ownership and other economic and social
account the contexts that condition the relationship between board
ties that could be either formal or informal (Khanna & Palepu, 2000;
diversity and performance measures (Post & Byron, 2015).
Khanna & Rivkin, 2001; Khanna & Yafeh, 2007; Mahmood, Zhu, &
Second, a vast majority of the studies have focused on developed
Zajac, 2011). While these structures share some features with multi-
nations from North America and Europe. Lately, the research has
divisional firms, they are quite different in many other aspects. Unlike
gathered some steam on economically important emerging markets like
multidivisional firms that have their divisional heads reporting to the
China, India, Russia, and Turkey (Ararat et al., 2015; Saeed & Sameer,
top management team or corporate headquarters, group-affiliated firms
2017; Talavera et al., 2018). However, the literature on board diversity,
being separate legal entities have their own top management teams and
by and large, ignores an important organizational form prevalent in
boards of directors, and publish their own financial statements
many of the developing as well as developed markets – business groups.
(Mahmood et al., 2011). Yet, group-affiliated firms operate with some
Third, much of the prior literature on board diversity remains lim-
degree of interdependence like divisions of a multidivisional firm, and
ited to examining gender effects on firm performance. These studies
one of the many mechanisms for ensuring coordination among the af-
generally ignore some of the other observable aspects of diversity such
filiated firms is director interlocks (Khanna & Rivkin, 2006). However,
as educational qualification, age, international experience, and tenure
little is known about how much do director interlocks affect the effi-
of the board of directors.
ciency of group-affiliated firms (Colli & Colpan, 2016; White,
Fourth, most of the extant literature makes use of monitoring as a
Hoskisson, Yiu, & Bruton, 2008).
dominant function of diverse boards, especially gender-diverse boards,
Business groups are an especially common form of corporate orga-
to explain their findings. Some studies, however, also lend support to
nization in several emerging countries as well as in some developed
the notion that diverse boards have superior advisory capabilities as
economies. They offer many avenues to add as well as destroy value in
well (Ali, Ng, & Kulik, 2014; Kim & Starks, 2016). Further, only a
their affiliated firms. That is why the prior literature terms business
handful of studies integrate the advisory and monitoring roles of di-
groups as ‘heroes or villains’ (Claessens, Djankov, & Lang, 2000), ‘red
verse boards to explain their findings (Ben-Amar et al., 2013; Carter
barons or robber barons’ (Perotti & Gelfer, 2001), and ‘paragons or
et al., 2010; Talavera et al., 2018).
parasites’ (Khanna & Yafeh, 2007). We survey the prior literature on
Fifth, the measure of diversity in much of the surveyed literature is a
business groups and summarize the benefits and costs of the business
simple proportion or a percentage of a particular category such as
group affiliation in Table 2.6
gender. A simple proportion or a percentage does not necessarily re-
The benefits of group affiliation may come in the form of internal
present diversity, and can potentially induce inaccuracies in the results.
markets for capital, management, or other resources that business
For instance, a good measure of gender diversity should attain its
groups create for affiliated firms, especially when the external markets
maximum value when both males and females are represented in equal
for capital and other resources are poorly developed and have high
proportions (i.e., boards comprising of 50% males and 50% females).4 A
transactions costs (Khanna & Palepu, 2000). The role of internal capital
measure such as the percentage of female directors on the board erro-
markets in business groups assumes even greater importance when
neously assigns higher values of gender diversity to firms that already
their member firms near financial distress (Gopalan, Nanda, & Seru,
have more than 50% of their board members as females. This is because
2007) and during periods of financial crises (Almeida, Kim, & Kim,
boards that have a dominant presence of female members are less
2015). Belonging to a business group often provides many other ad-
gender-diverse than boards that have an equal number of male and
vantages to the affiliated firms such as the lower regulatory risks and
female members. Only a miniscule number of studies use metrics such
costs using political connections (Bertrand, Mehta, & Mullainathan,
as Blau index, Shannon index, or the coefficient of variation (Ali et al.,
2002), the enhanced ability to innovate and internationalize (Chari,
2014; Ararat et al., 2015; Campbell & Mínguez-Vera, 2008; Talavera
2013; Komera, Jijo Lukose, & Sasidharan, 2018; Singh & Gaur, 2013),
et al., 2018), which are better measures of diversity (Harrison & Klein,
sensing and seizing of growth opportunities (Manikandan &
2007).
Ramachandran, 2015; Singh, Pattnaik, Gaur, & Ketencioglu, 2018),
Finally, with regard to measures of firm performance, the focus of a
acquiring and integrating firms (Popli, Ladkani, & Gaur, 2017), and
large number of studies has been confined to either the accounting-
financing of corporate acquisitions (Jindal & Seth, 2019). Business
based performance measures (such as return on assets and return on
groups continue to be advantageous to their affiliated firms even in the
equity) that are backward looking but objective, or the stock-based
improved institutional environments due to their complementarity with
measures of firm performance (such as Tobin’s Q) that are subjective
external capital markets (Chittoor, Kale, & Puranam, 2015).
but forward-looking, or both.5 The nascent literature has gone beyond
In contrast, the social costs of group affiliation may include ex-
propriation of minority shareholders rights to cash flows and other
corporate resources by the controlling group shareholders (tunneling),
4
We assume only two gender categories, males and females, for the sake of especially in emerging markets with weak corporate laws, poor investor
simplicity. protection, or poorly enforced regulations (Bertrand et al., 2002;
5
Accounting-based measures of performance are backward-looking because George & Kabir, 2008). Specifically, in the context of M&As, group-
they capture the past performance of a firm instead of indicators of the firm’s
future performance. Stock market-based measures, on the other hand, are more
likely to reflect future firm performance and are, therefore, considered to be 6
We confine the survey in Table 2 to Indian business groups to keep its scope
forward-looking. manageable.

5
 Table 2
Summary of studies based on the sample of Indian firms on the role of business group affiliation.
Author(s)
Panel A: Benefits of business group affiliation
Khanna and Palepu (2000)
Gopalan et al. (2007)
Chari (2013)
Singh and Gaur (2013)
Chittoor et al. (2015)
Manikandan and Ramachandran
(2015)
Gaur and Delios (2015)
Popli et al. (2017)
6
Komera et al. (2018)
Singh et al. (2018)
Elango, Dhandapani, and Giachetti
(2018))
Jindal and Seth (2019)
Panel B: Costs of business group affiliation
Bertrand et al. (2002)
George and Kabir (2008)
Singh and Gaur (2009)
Pattnaik et al. (2013)
Pattnaik, Lu, and Gaur (2018))
Broad area
Role of internal capital markets in filling
institutional voids
Role of internal capital markets in providing
financial support
Internationalization (FDI)
Innovation and internationalization
Complementary role of business groups with
external capital markets
Role of multi-entity organizational form and
portfolio diversity in incomplete markets
International diversification
Long-term acquisition performance
Innovation
Corporate expansion
Competition
Acquisition financing
Tunneling
Tunneling (inefficient profit redistribution)
Within-group governance mechanisms
Internal capital markets and transparency
Market power and entry barriers
R. Aggarwal, et al.
Sample and time period Key findings Journal
Indian firms (1993) Business groups create internal capital markets for their member firms, which are Journal of Finance
particularly important in the presence of institutional voids and market
imperfections such as underdeveloped external capital markets, weak corporate
laws, poor enforcement of regulations etc.
Indian firms Business groups use internal capital markets (intragroup loans) to provide support Journal of Financial Economics
(1989–2001) to financially distressed member firms so as to avoid negative spillovers of a
possible default by a distressed affiliated firm to rest of the group.
Indian firms Business group affiliation has a positive influence on emerging market firms' FDI Journal of World Business
(2001–2008) decisions in both developing and developed nations, and this relationship varies in
strength with the size and extent of diversification within business groups.
Indian firms Business group-affiliation is positively associated with the affiliated firms' strategic Journal of International
(2003–2009) decisions to innovate (R&D intensity) and internalize (new foreign investments). Management
Indian firms Group affiliation plays a complementary role in well-developed external capital Strategic Management Journal
(1994–2009) markets and their interaction improves the performance of affiliated firms.
Indian firms While the diverse business portfolio of business groups provides them with Strategic Management Journal
(1994–2010) privileged access to growth opportunities, their multi-entity organizational form
enables superior sensing and seizing of such opportunities.
Indian firms Business group affiliation positively moderates the negative relationship between Management International
(1990–2005) international diversification and firm performance. Review
Indian firms Group-affiliated firms exhibit a superior long-term acquisition performance Journal of Business Research
(2005–2013) compared to standalone firms.
Indian firms Business group affiliation positively influences the innovation (propensity to Asia Pacific Journal of
(1992–2013) undertake R&D activities and R&D intensity) by the affiliated firms, but the effect Management
declines with improvement in the institutional environment.
Indian firms Business groups help member firms in identifying opportunities as well as providing Journal of Business Research
(1995–2014) access to resources and capabilities. Group affiliation moderates the relation
between pro-market reforms and corporate expansion through new investments.
Indian firms Competition by business groups has a positive influence on the market returns of the International Business Review
(2004–2013) acquired firms’ rivals.
Indian firms Business groups help affiliated firms in the financing of their acquisitions, especially Journal of Corporate Finance
(1997–2016) when their insiders face a threat to control.
Indian firms The controlling shareholders of group-affiliated firms opportunistically transfer Quarterly Journal of Economics
(1989–1999) profits from affiliates with low cash-flow rights to affiliates with high cash-flow
rights and it results in expropriating minority shareholders.
Indian firms The inefficient redistribution of profits across group-affiliated firms explains the Journal of Business Research
(1998–2000) poor performance of these firms relative to standalone firms.
Indian and Chinese firms Integrating agency theory and institutional perspective, the study finds that group- Corporate Governance: An
(2007) affiliated firms perform worse than standalone firms in the post-reform period and International Review
that within-firm governance mechanism – ownership concentration – positively
moderates the negative effect of business group affiliation on accounting-based firm
performance (return on assets).
Indian firms Group-affiliated firms are less transparent relative to standalone firms due to a Asia Pacific Journal of
(1995–2003) greater reliance on internal capital markets. Management
Indian firms Business groups possess market power and can hinder the entry by unaffiliated firms Journal of Business Ethics
(1995–2014) in an industry.
International Business Review 28 (2019) 101600
R. Aggarwal, et al.
affiliated bidders, on account of tunneling of wealth from minority
shareholders to controlling (or majority) shareholders, realize sig-
nificantly lower abnormal returns around deal announcements relative
to those of standalone firms (Bae, Kang, & Kim, 2002). One of the ways
through which business groups facilitate tunneling during M&A deals is
by making the acquiring firms with lower insider holdings overpay the
target firms with high insider holdings (Jeong & Bae, 2013). Further,
even though group-affiliated firms derive several advantages from the
internal capital markets, a greater reliance on them makes group-af-
filiated firms less transparent compared to standalone firms (Pattnaik,
Chang, & Shin, 2013) and can also be used as a means to tunnel cash
flows (Jiang, Lee, & Yue, 2010). Also a major social and private cost is
that business groups may shelter underperforming firms for too long
(Gopalan et al., 2007).
Thus, it is clear that in spite of several advantages, the agency
conflicts manifested in group structures result in controlling share-
holders maximizing their own total wealth rather than maximizing the
wealth of individual group firms (Strange et al., 2009). The director
interlocking present in group-affiliated firms (Colli & Colpan, 2016;
Khanna & Rivkin, 2001, 2006) is likely to facilitate controlling share-
holders of the group to achieve these objectives. However, the literature
is largely devoid of any empirical evidence on the costs of such ar-
rangements for affiliated firms or the differential impact of group af-
filiation on the board diversity–firm performance relationship, and
board functioning within business groups remains a potential avenue
for research (Colli & Colpan, 2016)7 .
2.3. Framework and hypotheses development
As noted earlier, two major authoritative views on the functioning
of corporate boards can be found in the extant literature. While the
agency view notes that a board performs an important monitoring role
and helps to discipline self-interested managers (Fama & Jensen, 1983;
Hart, 1995; Jensen & Meckling, 1976), the resource dependence view
documents that a board performs an advisory and a counseling role in
addition to providing access to other resources such as connections with
key organizational stakeholders and other business partners (Pfeffer &
Salancik, 1978; Pfeffer, 1972). Following Hillman and Dalziel (2003);
Adams and Ferreira (2007), and Zona, Gomez-Mejia, and Withers
(2018), we integrate agency and resource dependence views and as-
sume that a board performs a dual but complementary role, monitoring
as well as advising management.
A demographically more diverse board is expected to have higher
quality resources at its disposal to advise management (Anderson et al.,
2011; Ben-Amar et al., 2013). To the extent that demographic diversity
of the board is reflected in the spirit of making it more diverse and
hence more resourceful, it should aid in improving the firm perfor-
mance. We, therefore, expect demographic diversity to have a positive
association, in accordance with the resource dependence view of cor-
porate governance, with general as well as special measures of firm
performance for standalone (non-affiliated) firms.
Group-affiliated firms are, however, known to have director inter-
locking with a high incidence of family or group members as directors
(Khanna & Rivkin, 2000, 2001, 2006; Silva et al., 2006). Even though it
is possible for the board members belonging to the family business
groups to artificially boost the observable demographic diversity, they
are unlikely to bring perspectives from outside the group. Thus, even
though group-affiliated boards may be nominally diversified, they are
7 H2A. For group-affiliated firms, the structural diversity of the board has
While there is some evidence of board independence being positively related
to firm performance in many countries with business groups, there does not
seem to be any assessments of how group affiliation influences the firm per-
formance relationship with different board diversity attributes (Fauver, Hung,
Li, & Taboada, 2017). Thus, this role of group affiliation seems to be an im-
portant area of further research globally.
7
International Business Review 28 (2019) 101600
unlikely to have effectively higher demographic diversity. Further, the
controlling shareholders of business groups are known for redis-
tributing resources across affiliated firms for overt and covert reasons
(Bae et al., 2002; Bertrand et al., 2002; George & Kabir, 2008; Strange
et al., 2009) and director interlocks of group family members with af-
filiated firms within the same business group may be used by the
controlling shareholders for achieving this objective. To the extent that
director interlocks of family members are used for serving group-goals
such as self-dealing or tunneling rather than individual firm goals, de-
mographic diversity should exhibit a negative association with the firm
performance of group-affiliated firms. For instance, the addition of a
female business group family member to the board of a group-affiliated
firm may increase its demographic diversity. However, such an ar-
rangement may actually decrease the performance of the firm if that
family member is fixated primarily on serving the interests of the group
or controlling shareholders. Based on these expectations, we state our
hypotheses related to the impact of board demographic diversity below:
H1A. For group-affiliated firms, the demographic diversity of the board
has a negative association with the general (Tobin’s Q) as well as
special (M&A performance) measures of firm performance.
H1B. For standalone firms, the demographic diversity of the board
exhibits a positive association with the general (Tobin’s Q) as well as
special measures of firm performance (M&A performance).
Based on the agency view, as noted earlier, boards that are struc-
turally more diverse in terms of having a good mix of independent and
non-independent directors should have better monitoring capabilities.
The monitoring capabilities of a board become important not only
when a conflict of interest arises between managers and owners in case
of separation of ownership and control but also in situations when large
shareholders can potentially use their controlling positions to ex-
propriate minority shareholders (Villalonga & Amit, 2006; Villalonga,
Amit, Trujillo, & Guzmán, 2015). Structural diversity of the board,
which we define based on the independence status of the board mem-
bers as mandated by relevant laws and regulations (in India through
Clause 49 and Companies Act 2013), therefore, can be expected to be
positively associated with the general performance of firms.
Unlike demographic diversity, structural diversity in group-af-
filiated firms is not affected by the director interlocking of board
members from within the family business groups because family or
group directors cannot be designated as independent directors in line
with regulations. Therefore, we postulate that the otherwise high in-
cidence of family or group directors in the group-affiliated firms (Silva
et al., 2006) is unlikely to affect the structural diversity in these firms.
So, we expect structural diversity to have a positive association with the
general measure of firm performance (Tobin’s Q), for both group-af-
filiated and standalone firms.
For making good strategic decisions such as those related to growth
(including inorganic growth through M&As) and innovation activities,
board members’ advisory role becomes more important than their
monitoring role in such situations (Kang, Liu, Low, & Zhang, 2018;
Schmidt, 2015; Singh & Delios, 2017). We, therefore, argue that the
resource dependence view should matter primarily and the agency view
should not play a significant role as far as M&A performance of a firm is
concerned. Consequently, we expect that structural diversity as re-
flected in the independence status of the board members should have
no significant association with the M&A performance of a firm. This
allows us to state our hypotheses based on the structural diversity of the
board as follows:
a positive association with the general measure of firm performance
(Tobin’s Q) and no association with the special measure of firm
performance (M&A performance).
H2B. For standalone firms, the structural diversity of the board has a
R. Aggarwal, et al. International Business Review 28 (2019) 101600

Fig. 1. Framework for studying the relationship between board diversity and firm performance for group-affiliated firms and standalone firms.
This figure presents the framework for studying the role of board diversity in firm performance outcomes for group-affiliated and standalone firms. ‘+’, ‘—’, and ‘No’
indicate significantly positive, significantly negative, and no significant association, respectively. The director interlocking in group-affiliated firms reduces de-
mographic diversity in the spirit (true sense) leading to its negative influence on performance. However, director interlocking has little or no impact on the structural
diversity of the board leading to a similar influence of structural diversity on firm performance for both group-affiliated and standalone firms.

Table 3
Summary of expectations.
Influence on the general measure of firm performance (Tobin's Q) Influence on the special measure of firm performance (M&A performance)

Group-affiliated firms Standalone firms Group-affiliated firms Standalone firms

Demographic diversity Negative Positive Negative Positive

Structural diversity Positive Positive Neutral Neutral

positive association with the general measure of firm performance
(Tobin’s Q) and no association with the special measure of firm
performance (M&A performance).
We capture these arguments in the framework shown in Fig. 1 and
summarize these expectations in Table 3.
brief overview of the regulatory environment in India in Appendix A).
The weak enforcement regime makes it possible for insiders of group-
affiliated firms to take sub-optimal decisions so as to benefit themselves
or the group as a whole at the expense of minority shareholders. Thus,
the Indian context provides us with an appropriate and interesting
setting for testing our hypotheses.

3. Methods
3.2. Sample selection

3.1. Empirical context

The set of firms for studying the effect of board diversity on the
general measure of firm performance consists of firms comprising the
We make use of the Indian setting to test our hypotheses. First, the
NIFTY 500 index (previously known as the CNX 500 index). This index,
Indian landscape is dominated by business groups (Khanna & Yafeh,
which forms about 95% of the free float market capitalization and more
2005, 2007). About 60% of the top 500 firms in India are affiliated with
than 90% of the traded value of all stocks listed on India’s National
business groups and make up about two-thirds of the total market-ca-
Stock Exchange (NSE), is analogous to S&P 500 index8 . We obtain the
pitalization (Jackling & Johl, 2009). Second, unlike state-owned and
demographic diversity data related to the board of directors of these
bank-owned business groups in China and Japan, respectively, the
firms from NSE Infobase on Indian Boards. We take the structural di-
ownership of business groups in India is more independent (Cuervo-
versity data as well as other firm-specific data from Prowess database
Cazurra, 2007). Third, business groups in India, like several other
over a ten-year period starting from April 1, 2006 (starting of FY06) to
emerging markets, employ extensive director interlocks of family
members across affiliated firms (Sarkar, 2010). Finally, during the
period of our study, there have been reasonably strong corporate reg- 8
See https://www.nseindia.com/products/content/equities/indices/nifty_
ulations in place in India, but with poor enforcement (we provide a 500.htm (last accessed on Apr 3, 2019).

8
R. Aggarwal, et al.
March 31, 2015 (ending of FY15). Prowess9 is maintained by the Center
for Monitoring the Indian Economy (CMIE) and has often been used in
the scholarly literature for capturing firm-level financial data in the
Indian setting (see, for examples, Bertrand et al. (2002), Manikandan
and Ramachandran (2015), and Chittoor et al. (2015)). As usual, we
remove the banking and financial sector firms from our sample due to a
different set of regulations as well as capital structure requirements for
these firms. We also remove firms which changed their fiscal years
during the period of this study because firms manage their earnings
around the change in fiscal year-ends (Du & Zhang, 2013). Finally, we
remove observations for which data corresponding to some of the
variables is not available. This results in a balanced panel design. Our
sample selection process yields a final sample of 2,512 firm-year ob-
servations comprising of 380 unique firms, out of which 1,787 firm-
year observations correspond to 252 unique group-affiliated firms, and
the rest 725 firm-year observations correspond to 128 unique standa-
lone firms (Panel A of Table 4).
For examining the impact of board diversity on our special measure
of firm performance, we use Thomson Reuters’ Thomson One database
to collect the data on successfully completed M&A deals announced by
publicly traded acquirers in India starting from April 2007 (that is,
starting from financial year FY07) until December 2015. Thomson One
database has been often used for extracting the M&A data of Indian
acquirers (see, for instance, Gubbi, Aulakh, Ray, Sarkar, and Chittoor
(2010) and Jindal and Seth (2019)). We include targets across all
countries to make sure that we include cross-border deals as well.
Following prior literature (Banerjee, Banerjee, De, Jindra, &
Mukhopadhyay, 2014; Huang, Jiang, Lie, & Yang, 2014), we include
observations with at least USD 1 million in deal size. We exclude all
deals for which the size is either undisclosed or unavailable in the
Thomson One database. We next apply the standard filters on the type of
deals and exclude all leveraged buyouts, spin-offs, recapitalizations,
self-tenders, repurchases, and privatizations in line with prior literature
(Baker & Savaşoglu, 2002; Burak Güner, Malmendier, & Tate, 2008).
We also drop observations for which the method of payment for the
deal is not known or the National Stock Exchange (NSE) scrip code of
the acquirer is either unknown or unavailable. Finally, conditional on
the availability of board composition data in NSE Infobase on Indian
Boards, we further restrict the analysis to acquirers belonging to the top
500 NSE listed firms (NIFTY 500) by market capitalization. The total
number of M&A deals in our final sample stands at 167, out of which
135 deals have been undertaken by 88 unique group-affiliated acquirers
and the rest 32 deals by 21 unique standalone acquirers (Panel B of
Table 4).
The data on board diversity pertains to fiscal year-end immediately
preceding the date of announcement of an M&A deal for studying the
relation of board diversity with our special measure of firm perfor-
mance. Though we do not expect much changes in board-level data
year-on-year, takeovers may dramatically change the composition of a
board and, therefore, this small lag in board diversity data with respect
to M&A deal announcement date is necessary to ensure that we capture
the composition of the acquirer’s board which approved the M&A deal.
The use of lagged board-level variables is consistent with prior litera-
ture (see, for example, Ali et al., 2014), and it also helps us in over-
coming the potential endogeneity in the form of reverse causality
(Ararat et al., 2015; Chen, Huang, & Chen, 2009). Thus, we use the
board composition and financial statement data over the same ten-year
period starting from FY06 to FY15 for our both analyses.
9
Due to unavailability of board diversity data in NSE Infobase on Indian
Boards prior to 2006, we are constrained to undertake this research only from
the year 2006 onwards.
9
International Business Review 28 (2019) 101600
3.3. Variables
We take demographic as well as structural diversity attributes as our
main explanatory variables. We measure the board-level demographic
diversity of a firm using attributes like gender, age, educational quali-
fication, and tenure of the board members with the firm. We capture the
structural diversity of the board members based on whether they have
been classified as independent or non-independent directors in con-
formity with the Indian regulations.
For each board attribute, we use either of the two diversity mea-
sures, the coefficient of variation or the Blau index (Blau, 1977), for
measuring diversity corresponding to our different attributes. First, we
employ the coefficient of variation for measuring the diversity of our
continuous attributes such as age and tenure of board members because
the Blau index is not suitable for measuring diversity corresponding to
continuous attributes (Tsui, Egan, & Xin, 1995). The coefficient of
variation, which provides a scale-invariant and direct measure of di-
versity, is given by the following expression:
Standard deviation
Coefficient of variation =
Mean
Second, for measuring diversity related to our discrete variables
such as gender, educational qualification, and independence status, we
use the Blau index given by the following expression.
p
Blau index = 1 − ∑ x i2
i=1
where p denotes the number of categories within a given attribute and
xi the fraction of (board) members in category i. The Blau index for an
attribute attains its minimum value of zero when all the members be-
long to a single category. The maximum value of the Blau index for an
attribute depends not only on the fraction of members within the de-
fined categories but also on the number of categories within the attri-
bute. For an attribute with p categories, the maximum value of the Blau
index is attained when members are equally distributed in all categories
and is given by (p-1)/p. We standardize the Blau index values for each
attribute by multiplying them with p/(p-1). The standardization process
ensures that we measure our diversity on a scale of 0 (minimum value)
to 1 (maximum value). For example, if a board has an equal re-
presentation of male and female directors, the Blau index for the gender
attribute translates to 0.5 and the corresponding standardized Blau
index value is 1. We use the Blau index for measuring diversity corre-
sponding to our categorical attributes like gender, educational qualifi-
cation, and board independence only.
We provide the definitions of variables used in the study in Table 5.
3.4. Estimation models
We propose the panel data regression model given by Eq. (1) for
studying the effect of board diversity on the general measure of firm
performance (Tobin’s Q).
TQit = α + β1 BOD _DEM _DIVit + β2 BOD _STL _DIVit
+ β3 BOD _ACT _MEETit + β4 BOD _BUSY_DIRit + β5 BOD _SIZEit
+ γ1 FIRM _SIZEit + γ2 LEVit + γ3 INSIDER_OWNit
+ γ4 INST _OWNit + ui + vt + εit (1)
Eq. (1) examines the association of board diversity with firm per-
formance after controlling for factors documented in previous litera-
ture. We use Tobin’s Q (TQ) as our general measure of firm perfor-
mance, not unlike prior literature (Dargenidou, Jaafar, & McLeay,
2014). Our explanatory variables, BOD_DEM_DIV and BOD_STL_DIV,
represent the demographic and structural board diversity, respectively.
BOD_DEM_DIV is the algebraic sum of diversity scores related to gender
(BOD_GEN_DIV), education (BOD_EDU_DIV), age (BOD_AGE_DIV), and
R. Aggarwal, et al. International Business Review 28 (2019) 101600

Table 4
Sample selection process.
Step Count

Panel A: Sample selection steps for studying the relation between board diversity and our general measure of firm performance
Number of firm-years data available from FY06 to FY15 4,888
Less: firm-years with unknown values of the dependent variable (332)
Less: firm-years without board composition data (109)
Less: firm-years from banking and financial sector (720)
Less: firm-years with changes in fiscal-year ends during the period of study (68)
Less: firm-years with some missing values (1,147)
Final set of firm-years [unique firms] 2,512 [380]
Group-affiliated firm-years [unique group-affiliated firms] 1,787 [252]
Standalone firm-years [unique standalone firms] 725 [128]

Panel B: Sample selection steps for studying the relation between board diversity and our special measure of firm performance
Number of deals announced from FY07 to FY15 4,135
Less: deals with deal size unavailable or undisclosed (2,713)
Less: deals less than USD 1 million in size (187)
Less: leveraged buyouts, spin-offs, recapitalizations, self-tenders, repurchases, and privatizations (119)
Less: deals not completed successfully (345)
Less: deals with the method of payment unknown or unavailable (398)
Less: deals with acquirer NSE scrip code unknown or unavailable (37)
Less: deals in which acquirers do not belong to NIFTY 500 (board composition data availability) (73)
Less: number of observations because of clubbing of deals by the same acquirer for the same target and less than 30 days apart from the date of the first (9)
announcement
Less: deals in which acquiring firms’ data on any of the variables of interest (stock returns, board composition, and other firm financials) is unavailable (87)
Final set of M&A deals [unique acquirers] 167 [109]
M&A deals by group-affiliated firms [unique group-affiliated acquirers] 135 [88]
M&A deals by standalone firms [unique standalone acquirers] 32 [21]

Notes: This table reports the step-by-step procedure for arriving at the final sample. While Panel A reports the sample selection procedure for examining the relation
between board diversity and our general measure of firm performance (Tobin’s Q) for group-affiliated as well as standalone firms, Panel B reports a similar procedure
for our special measure of firm performance (cumulative abnormal returns around the M&A deal announcements). The firm-level financial and board composition
data have been extracted from CMIE Prowess and NSE Infobase on Indian Boards. The M&A deal data has been extracted from Thomson One.

Table 5
Variable definitions.
Variable Definition

CAR Cumulative abnormal returns in the seven-day window (-3, +3) around the M&A deal announcement as a proxy for the special measure of firm performance
(winsorized at the 1% and 99% levels)
TQ Tobin’s Q, measured by (total assets + market capitalization – net worth) / total assets, as a proxy for the general measure of firm performance (winsorized at
the 1% and 99% levels)
BG An indicator variable equal to 1 for a group-affiliated firm, and 0 for a standalone (non-affiliated) firm
BOD_GEN_DIV Gender diversity of the board measured using Blau index with two categories, viz., “male” and “female”
BOD_EDU_DIV Educational diversity of the board measured using Blau index with two categories, viz., “up to graduation” and “post-graduation and above”
BOD_AGE_DIV Age diversity of the board measured using the coefficient of variation (i.e., the standard deviation of director age divided by mean age)
BOD_TEN_DIV Tenure diversity of the board measured using the coefficient of variation (i.e., the standard deviation of director tenure divided by mean tenure)
BOD_DEM_DIV Demographic diversity of the board calculated by summing up the diversity scores related to gender (BOD_GEN_DIV), education (BOD_EDU_DIV), age
(BOD_AGE_DIV), and tenure (BOD_TEN_DIV)
BOD_STL_DIV Structural diversity of the board measured using Blau index with two categories, viz., “independent” and “non-independent”, as reported by the company in
line with the legal requirements of Clause 49 in India
BOD_SIZE Total number of directors on the board of a firm
BOD_ACT_MEET Proxy for board activity measured by the total number of board meetings held in a fiscal year
BOD_BUSY_DIR Proxy for board busyness measured by the average number of directorships held by a board member of a firm
FIRM_SIZE Natural logarithm of the total assets of a firm
LEV Proxy for financial leverage of a firm given by total assets / net worth, or alternatively, 1 + (book value of debt/book value of equity)
INSIDER_OWN Cumulative shareholding of all insiders expressed as a fraction of the total shareholding
INST_OWN Cumulative shareholding of all non-insider institutions expressed as a fraction of the total shareholding
REL_SIZE Relative size of the transaction to acquirer’s market value of equity prior to the announcement of the deal
CASH_DEAL Indicator variable equal to 1 if the method of payment for the deal is cash only, and 0 otherwise
TARGET_PUB Indicator variable equal to 1 if the status of the target is public, and 0 otherwise
CROSS_BORDER Indicator variable equal to 1 if the deal is a cross-border acquisition, and 0 otherwise
IND_REL Indicator variable equal to 1 if acquirer and target share the same two-digit SIC code, and 0 otherwise

tenure (BOD_TEN_DIV).
Most of our control variables have been taken from previous studies
(see, for example, Jackling & Johl, 2009). We control for the activity
and the busyness of the board of a firm as measured by the number of
times the board meets in a fiscal-year (BOD_ACT_MEET), and the
average number of directorships held by a board member (BOD_BU-
SY_DIR), respectively. Our other control variables are: total number of
board members in a firm (BOD_SIZE), size of a firm as measured by
natural logarithm of its total assets (FIRM_SIZE), financial leverage of a
firm (LEV), equity stake of insiders (INSIDER_OWN), and equity stake of
non-insider institutional shareholders (INST_OWN) in a firm. We esti-
mate Eq. (1) separately for (i) the full set of firm-years, (ii) only group-
affiliated firm-years, and (iii) only standalone firm-years.
For studying the effect of board diversity on our special measure of
firm performance (M&A performance), we deploy a multiple linear
regression model given by Eq. (2).

10
R. Aggarwal, et al. International Business Review 28 (2019) 101600

CARi = α + β1 BOD _DEM _DIVi + β2 BOD _STL _DIVi + β3 BOD _SIZEi Table 6
Descriptive statistics.
+ γ1 REL _SIZEi + γ2 TARGET _PUBi + γ3 CASH _DEALi
Variable N Mean Std. Min Max
+ γ4 CROSS _BORDERi + γ5 IND _RELi + εi (2) Dev.

The dependent variable, CARi, in Eq. (2) represents the cumulative Panel A: Descriptive statistics for studying the relation between board diversity
abnormal returns around an M&A deal announcement by firm i. This and general measure of firm performance
measure has been employed extensively in the prior literature to TQ 2512 2.22 1.76 0.52 14.29
BG 2512 0.71 0.45 0 1
measure the extent of value creation or destruction in M&A deals
BOD_GEN_DIV 2512 0.18 0.24 0.00 0.98
(Golubov, Petmezas, & Travlos, 2013; Haleblian, Devers, McNamara, BOD_EDU_DIV 2512 0.78 0.26 0.00 1.00
Carpenter, & Davison, 2009; McWilliams & Siegel, 1997; Mulherin, BOD_AGE_DIV 2512 0.17 0.06 0.00 0.40
Netter, & Poulsen, 2017). We follow the standard event study metho- BOD_TEN_DIV 2512 0.73 0.26 0.00 2.05
dology (Brown & Warner, 1985; Kothari & Warner, 2007) to compute BOD_DEM_DIV 2512 1.85 0.46 0.00 3.40
BOD_STL_DIV 2512 0.93 0.16 0.00 1.00
the cumulative abnormal returns (CAR) around an M&A deal an-
BOD_ACT_MEET 2512 9.50 2.37 1 28
nouncement by a firm using Eq. (3). BOD_BUSY_DIR 2512 5.70 2.91 0.25 34.50
+3 BOD_SIZE 2512 9.30 2.73 1 21
FIRM_SIZE 2512 10.10 1.39 6.43 15.20
CARi (−3, + 3) = ∑ (Rit − (αi + βi Rmt ))
LEV 2512 2.53 2.63 −45.86 96.30
t = −3 (3)
INSIDER_OWN 2512 0.54 0.17 0.00 0.99
We use the value-weighted NIFTY 500 index as the market index INST_OWN 2512 0.22 0.13 0.00 0.71
and compute the parameters, αi and βi, of the market model using a Panel B: Descriptive statistics for studying the relation between board diversity
200-trading-day estimation window ending ten trading days prior to and special measure of firm performance
the event date. We choose a seven-day window centered at the deal CAR 167 0.00 0.06 −0.15 0.25
BG 167 0.81 0.39 0 1
announcement day for computing CAR because it is neither too short BOD_SIZE 167 9.60 2.75 4 18
unlike three-day window (−1, +1) nor too long unlike the eleven-day BOD_GEN_DIV 167 0.19 0.24 0.00 0.75
window (−5, +5) considered in some of the studies examining M&A BOD_EDU_DIV 167 0.73 0.27 0.00 1.00
performance in countries with the presence of business groups (Bae BOD_AGE_DIV 167 0.16 0.06 0.05 0.30
BOD_TEN_DIV 167 0.71 0.24 0.02 1.24
et al., 2002). Thus, we take CAR (−3, +3) as our dependent variable in
BOD_DEM_DIV 167 1.78 0.42 0.82 2.77
Eq. (2). BOD_STY_DIV 167 0.92 0.19 0.00 1.00
Similar to Eq. (1), BOD_DEM_DIV and BOD_STL_DIV in Eq. (2) denote REL_SIZE 167 0.09 0.24 0.00 2.50
the demographic and structural diversity of the board, respectively. In TARGET_PUB 167 0.35 0.48 0 1
addition to having board size (BOD_SIZE) as a control variable, we also CASH_DEAL 167 0.80 0.40 0 1
CROSS_BORDER 167 0.40 0.49 0 1
control for several acquirer, target, and deal characteristics like size of
IND_REL 167 0.43 0.50 0 1
the deal relative to size of the acquirer (REL_SIZE), whether the target is
a public firm (TARGET_PUBLIC), whether the deal is a pure cash deal Notes: This table reports the descriptive statistics for our samples. While Panel A
(CASH_DEAL), whether the target is in a different country than that of reports the summary statistics of our sample for examining the relation between
the acquirer (CROSS_BORDER), and finally whether target’s industry is board diversity and our general measure of firm performance (Tobin’s Q), Panel
related to that of the acquirer (IND_REL). The complete definitions of B reports the summary statistics for our special measure of firm performance
the variables are provided in Table 5. (cumulative abnormal returns around the M&A deal announcements). The
We estimate Eq. (2) separately for (i) the full set of acquisitions, (ii) variable definitions are given in Table 5.
acquisitions made by only group-affiliated firms, and (iii) acquisitions
made by only standalone firms. The dependent variables in Eqs. (1) and industries.
(2), TQ and CAR, have been winsorized at the 1% and 99% levels to We report the correlations among our variables in Table 7. While
mitigate the effect of outliers. Panel A of Table 7 shows the correlations for the sample chosen to study
the relationship between diversity and our general measure of perfor-
mance, Panel B of Table 7 shows the same for our special measure of
4. Empirical results
performance. The correlations between each pair of our explanatory
variables are fairly small in both the panels of Table 7. We can,
4.1. Descriptive statistics and correlations
therefore, safely say that we are unlikely to face any multicollinearity
issues in our multivariate analyses.
The descriptive statistics of our sample for examining the general
measure of firm performance are shown in Panel A of Table 6. Two-
thirds of our sample firm-years are affiliated with business groups. The 4.2. Findings
mean insider ownership in the sample firms is 54%, which is con-
siderably higher when compared to the proportions in most developed We first estimate the panel regression Eq. (1) with the general
nations. On average, a board is composed of about 9 members with the measure of firm performance (Tobin’s Q) as the dependent variable. We
board meeting about 9–10 times in a fiscal year, and a director in our estimate this regression with two-way fixed effects (that is, both firm
sample holds close to 6 directorships at other firms. fixed effects and year fixed effects).10 We correct the standard errors for
Panel B of Table 6 displays the descriptive statistics of our sample heteroskedasticity, autocorrelation, and cross-sectional dependence,
for studying the special measure of firm performance. About 81% of the which are commonly present in the panel data. The standard errors so
M&A deals in our sample are undertaken by group-affiliated firms. The corrected are known as Driscoll-Kraay standard errors. We report the
mean board size of a firm engaging in an M&A deal is between 9 and 10. results in Table 8. All the variables of interest are significant and carry
On average, deal size is about 9% of the market capitalization of an expected signs.
acquiring firm. A vast majority of the M&A deals undertaken by ac-
quiring firms in our sample have purely cash as the mode of payment. 10
Using Hausman test, we find that the fixed effects model is more appro-
About two-thirds of the acquired targets are private firms, and about priate as compared to the random effects model, and subsequently, we run the
40% of the acquired targets are from nations other than India. Finally, two-way fixed effects (that is, year fixed effects and firm fixed effects) esti-
43% of the deals in our sample have been undertaken in related mation model.

11
R. Aggarwal, et al. International Business Review 28 (2019) 101600

Table 7
Correlation matrix.
1 2 3 4 5 6 7 8 9 10 11 12

Panel A: Correlation matrix for studying the relation between board diversity and the general measure of firm performance

1 TQ 1
2 BG 0.00 1
3 BOD_DEM_DIV −0.04 −0.02 1
4 BOD_STY_DIV 0.00 0.13 −0.01 1
5 BOD_ACT_MEET −0.01 −0.07 0.07 −0.02 1
6 BOD_BUSY_DIR −0.01 0.22 −0.05 0.06 −0.05 1
7 BOD_SIZE 0.01 0.13 0.23 0.05 0.01 0.01 1
8 FIRM_SIZE −0.17 0.18 0.03 0.04 0.08 0.09 0.39 1
9 FIRM_AGE −0.08 0.13 0.14 0.04 −0.01 0.01 0.11 0.18 1
10 LEV −0.09 0.04 0.03 −0.01 0.06 −0.02 0.02 0.09 0.05 1
11 INSIDER_OWN 0.17 −0.18 −0.05 −0.02 −0.04 0.00 −0.09 −0.04 −0.19 −0.05 1
12 INST_OWN 0.06 0.16 0.06 0.03 0.04 0.06 0.18 0.33 0.19 −0.01 −0.61 1

1 2 3 4 5 6 7 8 9 10

Panel B: Correlation matrix for studying the relation between board diversity and the special measure of firm performance

1 CAR 1.00
2 BG −0.12 1.00
3 BOD_SIZE −0.12 0.04 1.00
4 BOD_DEM_DIV −0.15 −0.20 0.29 1.00
5 BOD_STY_DIV 0.02 −0.16 −0.12 0.11 1.00
6 REL_SIZE 0.37 −0.04 −0.11 0.01 0.03 1.00
7 TARGET_PUB −0.10 0.11 −0.06 0.04 −0.05 −0.13 1.00
8 CASH_DEAL 0.05 −0.09 −0.08 −0.09 −0.02 0.02 −0.29 1.00
9 CROSS_BORDER 0.07 −0.22 −0.02 0.08 −0.01 0.12 −0.30 0.31 1.00
10 IND_REL 0.01 −0.01 −0.13 0.08 0.09 0.06 0.06 0.01 0.22 1.00

Notes: This table reports the matrix of Pearson correlation coefficients for the key variables used in this study. While Panel A presents the correlation matrix for our
sample for examining the relation between board diversity and our general measure of firm performance (Tobin’s Q), Panel B reports the correlation matrix for our
special measure of firm performance (cumulative abnormal returns around the M&A deal announcements). The definitions of variables are given in Table 5. The
correlation coefficients which are significant at least at the 5% level are shown in boldface.

Based on the results presented in Table 8, we observe that demo- support to the hypothesis H1A, but the hypothesis H1B is not supported
graphic diversity is positively and significantly (p < .05) associated for our special measure of firm performance. Also, we observe that
with Tobin’s Q for standalone firms, but this association is significantly structural diversity is not associated with our special measure of per-
negative for group-affiliated firms. Every 1 percentage point increase in formance for either set of firms, lending support to our hypotheses, H2A
demographic diversity increases (decreases) the general firm perfor- and H2B.
mance of standalone (group-affiliated) firms by 0.47 (0.20) percentage
points. These are economically important results related to demo-
5. Discussion
graphic diversity and lend support to the hypotheses, H1A and H1B.
Also, we find from Table 8 that structural diversity of the board,
5.1. Theoretical contributions
which reflects the diversity in the independence of board members, is
significantly and positively associated with the general measure of firm
Our study makes three contributions to the literature. First, we
performance for our overall sample (p < .01), group-affiliated firms
contribute to the literature on board diversity by providing compelling
(p < .1), and standalone firms (p < .05), respectively, supporting our
evidence that it is not sufficient to just examine whether diverse boards
hypotheses, H2A and H2B.
influence firm performance, rather it is even more important to con-
With respect to our special measure of firm performance (cumula-
sider the conditions/contexts that might shape this relationship differ-
tive abnormal returns, CAR), we observe that standalone and group-
ently. Our findings, which are consistent with the meta-analysis of past
affiliated acquirers earn abnormal returns to the tune of 1.12% and
studies by Post and Byron (2015), call for differentiating between the de
-0.54% around the deal announcements, respectively. For our multi-
jure diversity (i.e., diversity in letter) and the de facto diversity (i.e.,
variate analysis, we run a cross-sectional linear regression model given
diversity in spirit) in the board of directors to arrive at a relatively
by Eq. (2).11 We also correct the standard errors for heteroskedasticity,
cleaner set of results on the diversity-performance relationship.
which is usually present in the cross-sectional data. Further, we cluster
Second, our work contributes to the literature on the costs of busi-
the standard errors at the acquirer’s industry (at a broad level). We
ness group affiliation by demonstrating how business groups impair the
report the results in Table 9.
positive effects of demographic board diversity in their affiliated firms.
While one of our main variables of interest, demographic board
While director interlocks of family members among firms affiliated with
diversity (BOD_DEM_DIV), is significantly negative (p < .05) for group-
the same business group can potentially increase the flow of resources
affiliated firms in Table 9 in line with our expectations, we do not find it
(Popli et al., 2017), our findings indicate that these arrangements can
significant for the sample of standalone firms. 12 These results lend
be detrimental in reducing the de facto demographic diversity in the
board of directors. These findings also suggest that the relationship
11
The data on M&A deals by various firms over different periods is treated
like cross-sectional data for econometric purposes. (footnote continued)
12
Many of our variables in Table 9 are not significant for the sample of be due to small size of our sample of acquisitions as a small sample limits the
standalone firms. It is possible that the non-significance of these variables may power of tests.

12
R. Aggarwal, et al. International Business Review 28 (2019) 101600

Table 8 Table 9
Regression results with the general measure of firm performance (Tobin’s Q) as Regression results with the special measure of firm performance (CAR) as the
the dependent variable. dependent variable.
(1) (2) (3) (1) (2) (3)
All firms Group-affiliated firms Standalone firms All firms Group-affiliated firms Standalone firms

BOD_DEM_DIV −0.023 −0.198** 0.469** BOD_DEM_DIV −0.018** −0.023** −0.020

(0.049) (0.074) (0.147) (0.008) (0.009) (0.025)
BOD_STY_DIV 0.315*** 0.130* 0.695** BOD_STY_DIV 0.005 −0.000 0.043
(0.076) (0.069) (0.282) (0.022) (0.022) (0.272)
BOD_ACT_MEET 0.005 0.008 −0.013* BOD_SIZE −0.001 −0.001 −0.001
(0.006) (0.011) (0.007) (0.001) (0.002) (0.004)
BOD_BUSY_DIR 0.006 0.017* −0.025 REL_SIZE 0.088*** 0.095*** 0.060
(0.007) (0.008) (0.022) (0.016) (0.012) (0.044)
BOD_SIZE 0.036 0.048 −0.006 TARGET_PUB −0.005 0.001 −0.058***
(0.029) (0.031) (0.019) (0.008) (0.011) (0.009)
FIRM_SIZE −0.617* −0.786** −0.147 CASH_DEAL 0.002 0.002 −0.031
(0.312) (0.298) (0.438) (0.010) (0.009) (0.038)
LEV 0.003 0.003 −0.006 CROSS_BORDER 0.003 −0.001 0.002
(0.003) (0.004) (0.019) (0.009) (0.010) (0.011)
INSIDER_OWN 2.760*** 3.360*** 0.638 IND_REL −0.001 −0.000 0.018
(0.492) (0.575) (0.511) (0.006) (0.005) (0.020)
INST_OWN 2.616*** 2.655*** 2.262** Constant 0.027 0.032* 0.047
(0.186) (0.271) (0.710) (0.017) (0.018) (0.217)
Intercept 6.759* 8.582** 2.579 Observations 167 135 32
(3.339) (3.120) (4.702) R-squared 0.167 0.194 0.168
Observations 2,512 1,787 725
R-squared (within) 0.23 0.24 0.25 Notes: This table reports the results of the cross-sectional ordinary least squares
regressions with our special measure of firm performance (cumulative ab-
Notes: This table reports the results of the two-way fixed effects panel data normal returns around the M&A deal announcements) as the dependent vari-
regression with Driscoll-Kraay standard errors robust to heteroskedasticity, able. The first, second, and third columns display the results for the complete
autocorrelation, and cross-sectional dependence with the general measure of set of firms, group-affiliated firms, and standalone firms, respectively. Variables
firm performance (Tobin’s Q) as the dependent variable. Firm and year fixed definitions are given in Table 5. The dependent variable, CAR, has been win-
effects are included but not reported. The first, second, and third columns sorized at the 1% and 99% levels. The standard errors reported in parentheses
display the results for the complete set of firms, group-affiliated firms, and are robust to heteroskedasticity and clustering at the acquirer’s industry (at a
standalone firms, respectively. Variables definitions are given in Table 5. The broad level). *, **, and *** denote statistical significance at the 10%, 5%, and
dependent variable, Tobin’s Q (TQ), has been winsorized at the 1% and 99% 1% levels, respectively.
levels for each year. Standard errors are given in parentheses. *, **, and ***
denote statistical significance at the 10%, 5%, and 1% levels, respectively.
to examine how heterogeneity in business groups (Ayyagari, Dau, &
Spencer, 2015; Gubbi, Aulakh, & Ray, 2015; Mukherjee, Makarius, &
between board diversity and firm performance requires re-examination Stevens, 2018; Purkayastha, Kumar, & Lu, 2017) could influence the
in the many countries where group affiliation is common. Finally, our relationship between board diversity and firm performance.
study also contributes to the broad literature on international business Finally, our assessment of special performance is based on how the
by showing in a new context the importance of taking into account stock market reacts to the announcements of M&A deals. This measure
international institutional differences such as the presence of business has been widely adopted in the finance (Golubov et al., 2013; Mulherin
groups in cross-country studies. et al., 2017) as well as management literature (Haleblian et al., 2009;
McWilliams & Siegel, 1997). The underlying assumption behind this
5.2. Limitations and directions for future research measure is that the market is efficient, and it can judge the outcome
correctly (Kothari & Warner, 2007). However, Hassan, Ghauri, and
Like other empirical work in the social sciences, this study also re- Mayrhofer (2018)) have recently suggested that the assessment of an M
flects a few limitations. Conditional on other data availability during &A outcome that is based on the takeover motives defined by the ac-
the period of our study, we did not have a sufficiently large number of quiring firm is possibly a more accurate measure. Future studies can
M&A deals undertaken by standalone firms in our sample. There are follow the measure suggested by Hassan et al. (2018) to validate the
two primary reasons for the lower number of acquisitions by standalone findings of our study.
firms relative to those by group-affiliated firms in India. First, about
60% of the top 500 firms in India are affiliated with business groups
(Chakrabarti, Megginson, & Yadav, 2008), and therefore our sample of 6. Conclusions
NIFTY 500 firms is likely to be dominated by group-affiliated firms.
Second, standalone firms are financially more constrained (Jindal & The board diversity–performance relationship has attracted much
Seth, 2019; Masulis, Pham, & Zein, 2011; Shin & Park, 1999), and they attention globally in the last decade or so, but despite theoretical
are therefore also likely to make fewer acquisitions compared to group- considerations advocating a positive relationship, there is little em-
affiliated firms. Future work can focus on a larger sample of standalone pirical consensus on whether diversity in the board of directors has a
firms, which can better help in confirming, extending, and generalizing positive, negative, or no significant influence on firm performance. The
the conclusions concerning board diversity measures. inconsistent results documented in the prior literature point to in-
Also, we could not include international diversity in the board of complete research designs with missing contextual factors important for
directors as a constituent of board demographic diversity in our re- understanding the board diversity–firm performance relationship in-
search design because of not having enough observations for this ternationally. Our study, which aims at addressing a part of this re-
variable. Future studies can expand the scope of board demographic search gap, proposes that business group affiliation is an important
diversity by including international diversity as one of its components contextual factor globally in the relationship between board diversity
in a different country context with a sufficiently large number of data and firm performance.
points. Similarly, future work could also extend the results of our study We adopt the resource dependence and agency views to study the

13
R. Aggarwal, et al. International Business Review 28 (2019) 101600

relationship between board diversity and firm performance for large Acknowledgments
firms in India, an emerging market with a dominant presence of busi-
ness groups. According to the resource dependence and agency views, We are grateful to the editor and two anonymous reviewers for
demographically and structurally more diverse boards are likely to have suggestions that significantly improved the paper. This paper has ben-
superior advisory and monitoring capabilities, respectively, and should, efitted from useful comments by colleagues on earlier drafts and par-
therefore, aid in improving firm performance. In this paper, we argue ticipants’ feedback received at the International Conference on
that the predictions based on these two views are likely to hold only Financial Markets and Corporate Finance (ICFMCF) 2017 in Kharagpur,
when the boards are demographically as well as structurally diverse not India, the Academy of Management (AOM) Annual Meeting 2018 in
just in the letter (de jure) but also in the spirit (de facto) of the laws/ Chicago, Illinois, USA, and the Academy of International Business (AIB)
regulations. Annual Meeting 2019 in Copenhagen, Denmark. Previous versions of
We make three significant contributions in this study. First, we show this paper were circulated/presented under the titles “Board diversity,
that business group affiliation is an important contextual/confounding business groups, and firm performance: Evidence from India” and
factor explaining the nature of board diversity–firm performance re- “Board diversity and firm performance: Role of business groups.” The
lationship. Despite several advantages of business group structures, authors remain solely responsible for any remaining errors. All authors
these organizational forms give rise to serious agency conflicts, espe- contributed equally to this article.
cially in emerging markets that typically have weak enforcement re-
gimes (Claessens & Yurtoglu, 2013). The agency conflicts often get
Appendix A. Corporate governance in India
manifested in the form of controlling shareholders of group-affiliated
firms maximizing their own total wealth rather than maximizing the
Unlike firms in several developed markets such as US and UK,
wealth of individual group firms (Strange et al., 2009). We argue that
Indian firms have concentrated ownership in the hands of founders,
director interlocking of business group family members at affiliated
who are popularly known as promoters in the local parlance
firms from the same business group can potentially be used as a means
(Chakrabarti et al., 2008; Narayanaswamy, Raghunandan, & Rama,
to maximize the controlling shareholders’ wealth at the expense of
2012). Since promoters manage the affairs of their companies using
minority shareholders. Thus, business group family members, who are
their positions as shareholders, managers, and directors, it is common
more likely to represent group goals rather than individual firm goals,
to call them as insiders (Jindal & Seth, 2019). The insiders can poten-
do not really increase the demographic diversity of the boards of af-
tially take undue advantage of their positions to divert funds from
filiated firms (as reflected in diversity of their opinion and expertise
minority shareholders to themselves unless corporate governance reg-
that may be helpful in improving firm performance) though they may
ulations check this misconduct. The potential expropriation of minority
boost the demographic diversity on paper.
shareholders has especially been a concern for group-affiliated firms
Consistent with our arguments, we find that board demographic
with pyramidal structures (Chakrabarti et al., 2008).
diversity has a positive and significant association with firm perfor-
India has been having a stock market actively functioning since
mance (Tobin’s Q) only in case of standalone firms, and this association
1875, unlike most other emerging markets. The corporate governance
is significantly negative for group-affiliated firms. We confirm the ne-
laws, however, remained weak and dysfunctional until the introduction
gative effect of group affiliation in a test based on a novel measure of
of major reforms in the late 1990s and early 2000s. The lack of strong
firm performance using the market reaction to the announcement of M
corporate governance regulations has had many undesirable ramifica-
&As. Overall, our results indicate that business group affiliation impairs
tions for Indian companies. For instance, weak governance including
the positive firm value effects of demographic board diversity that
ineffectual boards and a poor disclosure environment not only secluded
follow from the resource dependence view. This evidence of a see-
firms’ access to external capital markets, but also led to the ex-
mingly new cost of business group affiliation forms the second con-
propriation of minority shareholders at the hands of insiders
tribution of our study.
(Dharmapala & Khanna, 2013).
Structural diversity as reflected in the independence status of board
Securities and Exchange Board of India, the regulator of Indian se-
members, on the other hand, is unlikely to be affected much by director
curities markets, introduced the corporate governance reforms to fa-
interlocking in group-affiliated firms because family members from
cilitate external capital availability in 2000. A significant aspect of
business groups cannot be classified as independent directors under the
these reforms was the new Clause 49 for the governance of listed
Indian law and regulations in most other countries. Indeed, we find that
companies through the listing agreements with stock exchanges in India
board structural diversity does have a positive association with firm
(Black & Khanna, 2007). Since then this clause has been revised peri-
performance (Tobin’s Q), as predicted by the agency view, for both
odically for introducing new governance regulations as well as for
standalone and group-affiliated firms. Overall, as expected, the results
imposing penalties for non-compliance.
indicate that group affiliation does not impair the performance effects
The Indian corporate governance regulations, first enforced through
of structural diversity in affiliated firms.
Clause 49, mandate the inclusion of a minimum number of independent
While this study uses data on Indian firms, its conclusions are likely
directors as a proportion of the board size. At least 33% (50%) of the
to apply to firms in other economies with wide prevalence of business
board members of a listed firm in India should be independent if the
groups such as Argentina, Brazil, Chile, China, Indonesia, Israel, Italy,
chairperson of its board is a non-executive (executive) director
Japan, Mexico, Pakistan, Philippines, South Korea, Sweden, Taiwan,
(Balasubramanian, Black, & Khanna, 2010; Black & Khanna, 2007). The
Thailand, and Turkey to name a few. Further, the results of our study
enactment of the new companies act, The Companies Act 2013, has
are likely to be stronger in markets with business groups that have
further strengthened the corporate governance norms for Indian firms.
lower levels of investor protection and shareholder rights. The findings
This act among several provisions mandates the inclusion of at least one
of our study strongly imply that international business research designs
female director in the board composition of Indian firms. This provision
need to account for the country-specific institutional arrangements and
has also been included in the revised Clause 49 to align it with the new
ownership structures such as the presence of business groups. So, our
companies act.13
third contribution is to the broad literature on international business by
Though there have been strong corporate governance regulations in
documenting in a new context the critically important role of interna-
place lately, the enforcement of these regulations has remained weak.
tional variations in institutional, economic, and business structures,
especially for cross-country studies.
13
See http://www.sebi.gov.in/cms/sebi_data/attachdocs/1397734478112.
pdf (last accessed on Apr 3, 2019).

14
R. Aggarwal, et al.
The compliance with Clause 49 has been far from universal
(Balasubramanian et al., 2010; Dharmapala & Khanna, 2013). Having
strong laws with poor enforcement, therefore, has not been a major
deterrent for corporate misconduct (Narayanaswamy et al., 2012), and
insiders have continued to derive private benefits of control at the ex-
pense of minority shareholders.
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