Board Cultural Diversity and Firm Performance under Competitive Pressures

We examine the impact of board cultural diversity, based on directors’ ancestry, on firm
performance conditional on product market competition. We argue that culturally diverse
boards foster critical thinking and offer creative solutions that help firms thrive in competitive
environments. We document that culturally diverse boards are associated with superior
performance for firms operating in highly competitive industries. To address potential
endogeneity, we use a quasi-natural experiment of the U.S. import tariff cuts. We show that
firms with culturally diverse boards outperform following exogenous competition shocks from
significant import tariff reductions. The positive impact of board cultural diversity on firm
performance in competitive markets manifests in firms that innovate more, require creative
inputs, and face heightened predation risk due to their high interdependence with industry
rivals, in line with culturally diverse boards effectively performing their advisory role. Lastly,
we find no evidence that board cultural diversity is associated with enhanced monitoring as its
benefits fade in the presence of powerful CEOs.