Board’s interpersonal diversity and financial misreporting: evidence from USA

This study delves into the correlation between board interpersonal diversity and financial misreporting. The measure of interpersonal diversity draws from the ‘Out of Africa’ hypothesis, which examines how ancestral evolution has shaped individual traits such as cognitive skills, abilities, and levels of interpersonal trust. Extensive literature highlights how diversity in cognitive skills and interpersonal trust enhances board performance and monitoring mechanisms among members. Applying the ‘Too-Much-of-a-Good-Thing’ effect theory, we examine how the interpersonal diversity of board members in US firms from 1999 to 2019 mitigates agency problems and financial misreporting, particularly earnings management. Our primary finding suggests that higher board interpersonal diversity correlates with lower levels of accrual-based earnings management and real earnings management. We utilize various measures of earnings management and employ strategies to ensure the validity of our findings. These results hold strong across different tests and significantly contribute to the literature and future policy discussions regarding board diversity in companies.