Does Board Diversity Mitigate Risk? The Effect of Homophily and Social Ties on Risk-Taking in Financial Institutions

This study examines the effect of board diversity and social networks on risk in US financial institutions for the period from 2010 to 2018. The econometric strategy involved structural equations models, where risk as dependent variable was measured by two latent variables and a total of five measures of risk. Several aspects of board diversity were utilised including gender, social, experience and educational backgrounds. Results suggest that age and gender diversity had a minor effect to mitigate risk of financial institutions. National diversity had a significant and positive effect while appearing strongest when compared with other variables. Two education measures had mixed results while suggesting that financial education is associated with greater risk. Also, social networks have a significant effect on risk-taking especially on market risk. These results imply that financial institutions need to have a sensible level of board diversity in all aspects