Journal of Banking & Finance 53 (2015) 202214

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Journal of Banking & Finance

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

Board diversity and its effects on bank performance: An international

analysis
Emma Garca-Meca a,, Isabel-Mara Garca-Snchez b, Jennifer Martnez-Ferrero b
a
Technical University of Cartagena, Business Faculty, Accounting and Finance Department, Calle Real 3, 30201 Cartagena, Spain
b
University of Salamanca, Business Faculty, Accounting and Finance Department, Spain

a r t i c l e i n f o a b s t r a c t

Article history: This study analyses the effect of board diversity (gender and nationality) on performance in banks. By
Received 31 March 2014 making use of a sample of 159 banks in nine countries during the period 20042010, our empirical evi-
Accepted 3 December 2014 dence shows that gender diversity increases bank performance, while national diversity inhibits it. Com-
Available online 11 December 2014
plementarily, according to their institutional characteristics, we also show the moderating effect of
investor protection and bank regulatory regime on this previous relationship, analysing their substitution
JEL classication: or complementary roles. Our results also suggest that these institutional factors play a signicant role in
G20
these effects. They show that in contexts of weaker regulatory and lower investor protection environ-
G30
M14
ments, board diversity has less inuence on the performance of banks.
M41 2014 Elsevier B.V. All rights reserved.

Keywords:
Corporate governance
Board diversity
Gender
Performance

1. Introduction corporate directors in the US, nationality seems to have become

The High-Level Group on Financial Supervision in the EU and
the OECD concluded in 2009 that the deciencies in the
functioning of corporate governance mechanisms played a role in
the nancial crisis and in the following economic and nancial
consequences (de Larosire Group, 2009). For its part, the Basel
Committee on Banking Supervision has paid attention to the need
to study, understand, and improve corporate governance in banks,
since good corporate governance increases monitoring efciency
and is necessary to guarantee a sound nancial system and,
consequently, a countrys economic development (Principles for
Enhancing Corporate Governance, BCBS, 2010).
The bank board plays a vital role in the governance of complex
banks. In the presence of opacity in bank lending activities, the role
of bank boards is more important as other stakeholders such as
shareholders or debtholders are not able to impose effective gover-
nance in banks (Levine, 2004). Among board characteristics, board
diversity has become a major issue within corporate governance.
While attention is increasingly paid to the race and ethnicity of
Corresponding author. Tel.: +34 639250722.
E-mail addresses: emma.garcia@upct.es (E. Garca-Meca), lajefasal@usal.es
(I.-M. Garca-Snchez), jenny_marfe@usal.es (J. Martnez-Ferrero).
an important dimension of board diversity in Europe (Oxelheim
and Randy, 2003; Ruigrok et al., 2007). According to Struggles
(2011), nearly one in four directors of European boards is a non-
national, reecting the demand for international competencies.
Similarly, the role of women on boards is receiving increasing
attention. Prior research on gender differences suggests that
whereas there are no overall differences in effectiveness between
women and men, there are some gender-related differences behav-
iour and skills in some situations (Yukl, 2002). These differences in
leadership styles may have important implications for board effec-
tiveness (Nielsen and Huse, 2010).
Although gender or ethnic diversity has become a topic of active
policymaking in many countries, with some national governments
establishing quotas and others merely offering guidelines for
diversity, it is not clear how and whether these policies will have
the desired outcomes. Theories from economics, organisational
behaviour, and social psychology provide some understanding of
the nature of the link between board diversity and nancial perfor-
mance (Carter et al., 2010). Resource dependence theory suggests
that diversity holds the potential to improve the information pro-
vided by the board to managers due to the unique information held
by diverse directors. Differences in gender and nationality are very
likely to produce unique information sets that are available to

http://dx.doi.org/10.1016/j.jbankn.2014.12.002
0378-4266/ 2014 Elsevier B.V. All rights reserved.
 E. Garca-Meca et al. / Journal of Banking & Finance 53 (2015) 202214
management for better decision-making (Carter et al., 2010; Berger
and Neugart, 2012). On the contrary, theories from social
psychology suggest that decision-making may be slower and more
conicted with diverse directors. Thus, many researchers view
diversity as a double-edged sword (Milliken and Martins,
1996), specically improving group processes on some tasks and
leading to higher-quality solutions, while also decreasing cohesion
and all too often disrupting group processes. In this respect,
academic research has not been able to demonstrate a clear rela-
tionship between board diversity and effective board performance,
especially in banks. Furthermore, little is known about which laws,
bank supervisory strategies, or bank regulations enhance the gov-
ernance and functioning of banks (Caprio et al., 2007).
Following the recent calls to consider multiple dimensions of
diversity simultaneously, this paper analyses the effects of board
diversity (gender and nationality) on performance in banks.
According to Singh et al. (2001), instead of looking at possible bar-
riers to increasing board diversity, a better understanding is
needed of how female and foreign directors actually contribute
to board behaviour and performance. Our research is unique
because we examine the effects of both nationality diversity and
gender diversity in banks, which is not common in the literature.
Complementary to our main objective, we test whether board
diversity matters more or less in countries accordingly their insti-
tutional characteristics. Given the importance of banks in the econ-
omy, it is crucial to understand which laws and regulations
improve their governance. Therefore, it is interesting to test if
the hypothesis based on the efciency/inefciency of a diverse
board can be generalised further than the institutional differences
among countries. Although comparative cross-national research
has addressed a wide range of phenomena, it has not contributed
signicantly to research on corporate boards of directors
(Grosvold and Brammer, 2011). To bridge this gap, we examine
the moderating effect of investor protection and bank regulatory
regime on the association between board diversity and perfor-
mance, analysing their substitution or complementary roles.
This empirical study is conducted with a sample of 159 banks in
nine countries (Canada, France, Germany, Italy, the Netherlands,
Spain, Sweden, the United Kingdom, and the United States) during
the period 20042010. We take into account the endogenous nat-
ure of the relation between governance and performance.
Our paper contributes to the existing literature in different
ways. First, this paper contributes to research concerned with cor-
porate governance and banks, where it has been observed that the
eld would benet from further international studies (Basel Com-
mittee on Banking Supervision). The banking industry provides an
interesting framework to expand the study of the consequences of
board diversity on performance, particularly in light of the recent
global nancial crisis and bank director exposure to legal liability.
As far as it could be ascertained, this is the rst study to show that
bank board diversity is relevant to bank performance in a way con-
sistent with the banks institutional environment.
Second, our analysis makes an important contribution to the
international corporate governance literature, which has called
for further analysis of how country-level institutional systems
inuence a variety of interest group-level phenomena (Redding,
2005), and to research concerned with women on boards, where
it has been observed that the eld would benet from further
international studies (Terjesen et al., 2009; Grosvold and
Brammer, 2011). Some studies have analysed the effect of women
or nationality on performance, but none of them has studied
whether the effect of board diversity is related to investor protec-
tion or country-level bank regulation where the nancial institu-
tion is located. Given the signicant debate concerning the mix
of policies and practices necessary to promote minorities partici-
pation on corporate boards, this analysis is able to shed light on
203
the relevance of national institutional systems to this debate. This
paper also has important implications for both public policy and
the governance of business rms. If there is no difference between
competent women and foreign directors and other qualied direc-
tors, then the desirability of gender and national diversity would
primarily be a public policy issue.
The remainder of the paper is organised as follows. Section 2
reviews the main theoretical ideas and states our hypotheses about
the inuence of board diversity on bank performance. Section 3
describes the sample, data, and empirical method. Section 4 con-
tains the empirical results and Section 5 provides our summary
and conclusion.
2. Background and hypotheses development
Boards of banking entities are quite different from boards of
non-nancial rms. In particular, boards in the banking sector tend
to be bigger and more independent than those in the non-nancial
sector (de Andrs et al., 2012). These directors are subject to more
scrutiny than directors of publicly traded non-bank corporations.
In addition to being accountable to shareholders and the securities
and exchange regulators, they are accountable to banking regula-
tors. More than directors of non-bank entities, they may be consid-
ered to be accountable to other stakeholders such as depositors,
because individual bank failures can have spillover effects on other
banks. They may also face greater liability risk than directors of
non-bank entities (Adams and Ferreira, 2012) and play a key advi-
sory role to managers regarding strategy identication and imple-
mentation (de Andres and Vallelado, 2008).
The importance of directors backgrounds and characteristics
beyond independence is increasingly being recognised (Hillman
et al., 2000, 2002). According to Ingley and Van der Valt (2003, p.
219), the concept of diversity relates to board composition and
the varied combination of attributes, characteristics and expertise
contributed by individual board members in relation to board pro-
cess and decision making.
The nationality of directors is one of the main characteristics of
board diversity. The increasing internationalisation of business
leads to higher demand for directors who possess the necessary
knowledge and contacts in foreign markets to link the rm to the
different contexts of the countries in which it operates
(Carpenter et al., 2001). The literature suggests that foreign direc-
tors go beyond nancial contributions and extend to the provision
of managerial expertise and technical collaborations, increasing
creativity and innovation. Directors with different nationalities
introduce heterogeneity of ideas, experiences and points of view
(Ezat and El-Masry, 2008; Samaha et al., 2012). Further, diversity
on boards may reduce information asymmetry and the associated
agency costs; improve the nancial exibility of domestic rms
by increasing the pool of potential investors and nancing oppor-
tunities; and expand cross-border ows of knowledge and technol-
ogy (Fogel et al., 2013). In this line, Carter et al. (2003) nd a
signicant positive relationship between the percentage of ethnic
minority directors on the board and Tobins Q. Similarly, by using
a sample of rms with headquarters in Norway or Sweden,
Oxelheim and Randy (2003) indicate a signicantly higher value
for rms that have outsider Anglo-American board members. The
results are similar for Choi et al. (2007) in Korea.
Nevertheless, reviews of diversity research conclude that while
traditional forms of task-related diversity are often associated with
positive cognitive and signalling consequences (e.g. creativity,
innovation, better image, etc.), the more relations-oriented diver-
sity can lead to negative communication and affective conse-
quences such as lower decision speed, misunderstandings, and
conicts (Konrad and Kramer, 2006; Ruigrok et al., 2007). These
dissimilar others are likely to show lower commitment to the
204 E. Garca-Meca et al. / Journal of Banking & Finance 53 (2015) 202214
organisation, express less satisfaction, perceive more discrimina-
tion, and display a variety of other negative behavioural and attitu-
dinal outcomes (Jayne and Dipboye, 2004a,b). In this respect,
Westphal and Milton (2000) suggest that a central nding of the
literature is that demographic differences lower social cohesion
between groups and that social barriers reduce the probability that
minority viewpoints inuence group decisions.
According to Masulis et al. (2012), foreign directors are likely to
be less familiar with national accounting rules, laws and regula-
tions, governance standards, and management methods, making
it more difcult for them to evaluate managerial performance or
challenge managerial decisions. Their results nd that rms with
foreign directors in the US exhibit signicantly lower returns on
assets, especially when they do not have a signicant business
presence in their home region. In this line, relational demography
research in psychology has also shown that working with demo-
graphically dissimilar others is often associated with negative out-
comes (Riordan, 2000). Another reason to expect a negative
inuence of foreign directors on rm performance is that on bank
boards, most foreign directors represent investors who have differ-
ent investment horizons and who are primarily oriented towards
stock market-based measures of performance. As a result, foreign
directors who represent foreign fund managers may be much more
likely to be concerned about selling the shares of an underperform-
ing company than investing time and energy in instituting a pro-
cess of corporate restructuring (Douma et al., 2006). Based on the
theory and conicting empirical evidence, the effect of foreigners
on banks boards can be negative or positive. We thus pose the fol-
lowing hypothesis:
H1. Board national diversity does not inuence the performance of
banks.
Board diversity also relates to the debate over the effects of
women on the rm. Gender diversity has become a topic of active
policymaking in many countries, with some national governments
establishing quotas for publicly traded and/or state-owned enter-
prises and others merely offering guidelines for diversity (Singh
et al., 2008; Ferrero-Ferrero et al., 2013). Previous research sug-
gests that most women directors are likely to possess staff/support
managerial skills such as legal, human resources, communications,
and public relations skills rather than operations and marketing
functions, in contrast to men (Zelechowski and Bilimoria, 2004).
They are also more likely to have non-business backgrounds and
to hold advanced degrees (Hillman et al., 2002), helping rms gain
competitive advantage by dealing more effectively with diversity
in their product and labour markets (Bilimoria and Wheeler,
2000). Similarly, previous research brings up the idea of value in
diversity, suggesting that female board members offer diverse
viewpoints to the boardroom, help better represent all sharehold-
ers, and promote lively boardroom discussion (Letendre, 2004) and
transparency (Upadhyay and Zeng, 2014). Given the glass ceiling
phenomenon, women also have to demonstrate additional compe-
tencies to reach directorship positions, which implies that women
are quite likely to be highly procient and diligent as directors
(Eagly and Carli, 2003).
The effect of women directors has been empirically examined in
many studies (e.g. Farrell and Hersch, 2005; Ahern and Dittmar,
2012; Matsa and Miller, 2013; Goergen and Renneboog, 2014). In
the most comprehensive review of this research, Terjesen et al.
(2009) identify over 400 published references on the topic, noting
that previous ndings on the direct effect of female directors on
performance are inconclusive. Even though the ndings are con-
tradicting and the positive or negative impact of female directors
is still undetermined, most studies suggest that gender diversity
has a positive impact on rm performance. For example, Carter
et al. (2003) in the US, Campbell and Mnguez-Vera (2008) in Spain
and Hutchinson et al. (2014) in Australia stress this positive
relationship by underlining that women directors have a positive
effect on nancial performance.
Recently, in micronance institutions, the results note that
more women are better able to lower operating costs
(Chakrabarty and Bass, 2014) and improve nancial performance
(Strm et al., 2014). In addition, Liu et al. (2014) study this issue
for Chinese rms over the past decade and report that rm perfor-
mance is positively related to gender diversity, although they note
that there also needs to be a critical mass of at least three to obtain
a positive effect.
On the other hand, other papers have found a negative or null
relationship between the proportion of women on the board and
performance. For example, Smith et al. (2006) nd a negative
relationship between the gender diversity of the board and gross
prots to sales for a sample of Danish rms but no statistically sig-
nicant relationship between board gender diversity and several
other accounting measures of nancial performance. Recently,
Phatan and Faff (2013) showed that although gender diversity
improved bank performance in the pre-SarbanesOxley Act (SOX)
period (19972002), the positive effect of gender diminished in
both the post-SOX (20032006) and the crisis periods (2007
2011).
Consequently, it is not clear how and whether women on
boards have the desired outcomes, because academic research
has not been able to demonstrate a clear relationship between gen-
der diversity and effective board performance. Then, we pose the
hypothesis in a null format:
H2. Board gender diversity does not inuence the performance of
banks.
3. Methodology
3.1. Population and sample
The sample used in the study consists of 877 observations for
159 listed banks in nine countries (Canada, France, Germany, Italy,
the Netherlands, Spain, Sweden, the UK, and the US). The period of
analysis is from 2004 to 2010, although at times there is no avail-
able information for some banks, meaning that the sample has an
unbalanced character. The economic and nancial data used to
measure bank performance, bank assets, and loans were obtained
from the Compustat database, while corporate governance data
were drawn from two other databases, namely EIRIS and the Spen-
cer & Stuart Board Index. More concretely, from the Spencer & Stu-
art Board Index, we obtained the main board characteristics
variables such as the size, activity, and number of commissions
as well as the presence of independent directors. Information
about board diversity, both nationality and gender, were obtained
from the EIRIS database.
The procedure to elaborate on our database started with the
identication of the characteristics of banks board of directors
from the Spencer & Stuart Board Index. Thereafter, we comple-
mented this information with that available in EIRIS. Finally, we
collected accounting information on the banks from Compustat
les.
Table 1 shows the sample distribution by year and country. As
may be noted, higher percentages refer to the years from 2007,
making up 65% of the observations. In relation to geographic diver-
sity, 47.21% of the observations belong to companies located in the
US, followed by 21.21% owned by UK companies. The remaining
observations are evenly distributed among the other countries
and years analysed.
 E. Garca-Meca et al. / Journal of Banking & Finance 53 (2015) 202214
Table 1
Sample distribution.
Distribution of observations by year
TOTAL 2004 2005
877 87 97
100% 9.92 11.06
Distribution of observations by country
TOTAL Canada France Germany
877 67 19 23
100% 7.64 2.17 2.62
3.2. Variables
We measure bank performance by using Tobins Q (called Q),
calculated based on the most usual proxy: the book value of total
assets minus the book value of common equity plus the market
value of common equity divided by the book value of total assets.
In addition, with the aim of testing the robustness of the analysis
based on Tobins Q, we use another measure of bank performance,
return on assets (ROA). ROA is calculated as the income before
extraordinary items, interest expense, and taxes divided by the
average of the two most recent years of total assets. Other previous
studies of corporate governance effectiveness, and more concretely
board effectiveness, have used these measures to represent bank
performance (e.g. de Andrs and Vallelado, 2008). In general,
authors have used both measures although most researchers have
found a signicant relationship with one measure but no relation-
ship with other measures because these variables use different
types of numerators and denominators to calculate bank perfor-
mance. However, it is necessary to use both as they complement
each other. Tobins Q is a market-based measure that reects
unstructured and volatile bank performance better than ROA. The
complementary use of ROA an accounting-based measure
allows us to consider possible market anomalies that may act as
an impediment to all available information being reected in the
stock price.
In relation to the variables that may explain bank performance,
we dene %WOMEN and %FOREIGNERS to represent the diversity of
the board. They are calculated as the percentage of female and for-
eign directors on boards, respectively. Nationality and gender
diversity are associated with these members representation in
boardrooms.
To avoid biased results, we consider a set of control variables
whose effects have been found in previous studies, related to board
structure and bank structure. Board structure is represented by
size, independence, and activity. Board size (BoardSize) is repre-
sented by the total number of directors. Board independence is
determined by two variables: %Indep represents the percentage
of independent directors on the board of directors by company
and Duality is a dummy variable that takes the value one if the
CEO is the chairman of the board and zero otherwise. Board activ-
ity is represented by the number of board meetings by year (Activ-
ityBoard) and the number of board sub-committees (Commissions).
Jensen (1993) argues that as board size increases, boards
become less effective at monitoring management because of free-
riding problems among directors and increased decision-making
time. However, Dalton et al. (1999) argue that large boards may
be benecial because they increase the pool of expertise and
resources available to the organisation. Our sample is characterised
by large, organisationally complex banks, implying that the aver-
age effect of board size on bank performance may be positive. In
addition, a higher presence of independent directors should be
endowed with the knowledge, incentives, and abilities required
to monitor managers (Harris and Raviv, 2008). Actions may be
improved by separating the role of the CEO and chairman of the
205
2006 2007 2008 2009 2010
117 137 154 148 137
13.34 15.62 17.56 16.88 15.62
Italy Netherlands Spain Sweden UK US
66 25 56 21 186 414
7.53 2.85 6.39 2.39 21.21 47.21
board, since this avoids the problems associated with the same
person being responsible for making and implementing strategic
decisions as well as evaluating the effectiveness of those decisions.
In other words, there is a reduced possibility that the CEO will act
in his/her own interests and reduce bank performance. In relation
to board activity and sub-committees, the organisational complex-
ity of our bank sample suggests a positive relationship between
both board characteristics and bank performance. A higher number
of meetings and the establishment of board committees is a means
to channel the many functions of the board into segregated and
specialised groups or meetings of directors that focus on specic
subject matters concerning the modus operandi of the
organisation.
The control variables that identify differences in bank structure
are bank size (BankSize), represented by the logarithm of the banks
total assets (at book value), and Loans, measured as the ratio of
loans to total assets (at book value). de Andres and Vallelado
(2008) suggest that although large banks present lower costs and
higher market power, more growth is the major factor in determin-
ing protability.
Table 2 shows the descriptive statistics of the variables pro-
posed for the analysis: the dependent variables (Q and ROA), inde-
pendent variables (%WOMEN, and %FOREIGNERS), and control
variables (BoardSize, %Indep, Duality, ActivityBoard, Commissions,
BankSize, and Loans). On average, the sampled boards are formed
by 13 directors and have nine/ten meetings per year. The mean
presence of independent directors is 71%. The mean presence of
female directors is very low (10%) as is foreigners, 18%. In the last
two columns, it is possible to observe the results of the Kruskal
Wallis test that evidences signicant differences in the variables
by country and year. In this sense, it is necessary to include coun-
tries control variables in the model as well as year dummies.
Finally, it is necessary to take into account that in some coun-
tries CEO duality does not exist. Although fewer banks in these
countries have not split the top two management positions, the
frequency relating to countries such as Spain and Italy is quite
important. In order to identify potential problems associated with
these corporate differences, Table 3 shows several median differ-
ences tests between the variables in Spain/Italy and the other
countries. In addition, we determine if these differences are rele-
vant for those banks with two- or one-tier board structures. For
this, we jointly consider banks in Spain, Canada, the UK and the
US compared with the other countries. The vertical two-tier sys-
tem is typical of the other countries in the case of large companies,
while companies in France and Italy may choose between these
two models. For both countries corporate governance characteris-
tics, the test shows statistically signicant differences. Therefore, it
is necessary to include a robust analysis to divide the sample into
two settings.
3.3. Model of analyses
The relationships previously proposed in the hypotheses of this
study are materialised in the following panel data models. Using
206 E. Garca-Meca et al. / Journal of Banking & Finance 53 (2015) 202214

Table 2
Descriptive statistics.

Mean Standard deviation KruskalWallis

Chi-square for country Chi-square for year
Q 1.10 0.14 69.35*** 75.507***
ROA 0.97 0.86 49.96*** 40.078***
%WOMEN 0.10 0.19 186.82*** 5.159
%FOREIGNERS 0.18 0.25 457.50*** 3.787
BoardSize 12.79 3.87 162.89*** 19.416***
%Indep 0.71 0.44 461.72*** 2.659
ActivityBoard 9.60 4.74 78.98*** 34.945***
Commissions 3.55 0.89 32.25*** 4.928
BankSize 9.97 2.79 70.13*** 21.139***
Loans 0.41 0.14 170.11*** 2.530
Frequency
Duality 39% 227.88*** .979

Q, the book value of total assets minus the book value of common equity plus the market value of common equity divided by the book value of total assets. ROA, income before
extraordinary items, interest expense, and taxes divided by the average of the two most recent years of total assets. %WOMEN, percentage of female directors on the board.
%FOREIGNERS, percentage of foreign directors on the board. BoardSize, the total number of directors on the board. %Indep, the percentage of independent directors on the
board. Duality is a dummy variable that takes the value one if the CEO is the chairman of the board and zero otherwise. ActivityBoard, the number of annual meetings of the
board. Commissions, the number of board sub-committees. BankSize, the logarithm of total bank assets at book value. Loans, the ratio of loans to total assets at book value.
***
p-Value < 0.01.

Table 3
Statistical tests.
Q ROA
Country differences: duality vs. separate role
U de MannWhitney 39,850.50
W de Wilcoxon 47,353.50
Z 2.20
Sig. asintt. (bilateral) .028
Country differences: one tier vs. two tier
U de MannWhitney 33,500.00
W de Wilcoxon 44,976.00
Z 7.37
Sig. asintt. (bilateral) .000
panel data enables us to assess bank performance in the sample
over time by analysing observations from several consecutive
years for the same banks. Moreover, the temporal dimension of
the data, particularly in periods of great change, enriches the study.
The proposed model highlights the impact of board diversity on
bank performance. For this, %WOMEN and %FOREIGNERS are
included as explanatory variables of bank performance, measured
by Tobins Q and ROA. Moreover, we include the control variables
previously detailed (BoardSize, %Indep, Duality, ActivityBoard, Com-
missions, BankSize, and Loans), as well as variables representing
country (Country) and year (Year).
Since we use panel data, we must consider both the individual
represented by the sub index i and the time point represented by t.
In addition, the error term is decomposed into two parts: the com-
bined effect (lit), which varies between individuals and periods of
time, and the individual effect (gi), which is characteristic of each
individual (banks in this case). This term varies among individuals,
but is constant over time:
Q ==ROAit b0 b1 %WOMENit b2 %FOREIGNERSit
b3 BoardSizeit b4 %Indepit b5 Dualityit
b6 Activ ityBoardit b7 Commissionsit
X gests that different types of directors provide different benecial
b8 BankSizeit b9 Loansit bj Countryi
X
bk Yeart gi lit
These models are empirically estimated by applying the
generalised method of moments (GMM) estimator proposed by
Arellano and Bond (1991). With this estimator, we can control
for the endogeneity problems that may appear in the models.
Although the endogeneity issue can also be controlled for by using
a simultaneous equation estimator such as maximum likelihood
and two- or three-stage least squares estimators, the choice is
40,222.00 based on consistency concerns (de Miguel et al., 2005). This is so
47,725.00 because the above-mentioned estimators are more efcient than
2.25 GMM, but they are not consistent and thereby they generate biased
.025
results since they do not eliminate unobservable heterogeneity
rms specicity that gives rise to a particular behaviour. These dif-
38,898.00
ferences between individuals (banks in this case) are potentially
50,833.00
5.88 correlated with the explanatory variables (also called individual-
.000 specic effects), invariant over time, and they thus directly
inuence corporate decisions (entrepreneurial capacity, corporate
culture, etc.).
4. Empirical results
Table 4 shows the bivariate correlation analysis matrix of the
variables used in these models. It can be seen that BankSize and
%FOREIGNERS present the highest correlations with Tobins Q
(dependent variable), positive in the case of BankSize and negative
in the case of %FOREIGNERS. ROA presents the highest correlation
with BankSize, showing a negative relationship. The correlations
between the independent variables are not very high, meaning that
multicollinearity is not a problem in our models.
Table 5 shows the estimated results for the proposed model in
order to explain the role of board diversity on Tobins Q. The results
for the model proposed show the impact that board diversity
exerts on Tobins Q. %WOMEN impacts positively on Q (coef.
4.932) and %FOREIGNERS impacts negatively on it (coef. 1.163).
These effects are both statistically signicant at the 99% condence
level. These results support the evidence of Hillman et al. (2002),
Peterson and Philpot (2007) and Peterson et al. (2007), who sup-
port the idea that women and ethnic minority directors may have
different functions on the board. Our results also conrm Hillman
et al.s (2000) extension of resource dependence theory that sug-
resources to the rm. Then, although some papers suggest that a
Model1 more diverse board provides more valuable resources, which
should improve rm performance, this paper conrms that in
banks, the type of diversity seems to be important.
Meanwhile, with respect to womens role on the board, our
ndings conrm the evidence obtained by Burke (1997)
 E. Garca-Meca et al. / Journal of Banking & Finance 53 (2015) 202214 207

Table 4
Bivariate correlations.

Q ROA %WOMEN %FOREIGNERS BoardSize %Indep

**
ROA 0.257
%WOMEN 0.009 0.036
%FOREIGNERS 0.077* 0.002 0.272**
BoardSize 0.026 0.007 0.122** 0.022
%Indep 0.019 0.012 0.542** 0.003 0.232**
Duality 0.022 0.025 0.03 0.310** 0.051 0.046
ActivityBoard 0.029 0.024 0.012 0.063 0.013 0.002
Commissions 0.028 0.028 0.037 0.057 0.266** 0.06
BankSize 0.083* 0.097** 0.104** 0.015 0.323** 0.105**
Loans 0.018 0.019 0.104** 0.064 0.229** 0.025
Duality ActivityBoard Commissions BankSize
ActivityBoard 0.032
Commissions 0.154** 0.149**
BankSize 0.101* 0.098** 0.270**
Loans 0.133** 0.014 0.094* 0.164**
*
p-Value < 0.05.
**
p-Value < 0.01.

Campbell and Mnguez-Vera (2008), Liu et al. (2014) and Strm
et al. (2014), who support that boards with more women are
associated with a less volatile stock price and higher corporate per-
formance. Similarly, the results are in line with psychology theo-
ries (Riordan, 2000) and previous ndings (Masulis et al., 2012)
that note that working with demographically dissimilar others is
associated with negative outcomes.
Regarding the control variables, BoardSize, %Indep, and Activity-
Board, positively impact on Tobins Q, while Duality and Commis-
sions have a negative impact on it. These effects are statistically
signicant at different condence levels, except BankSize and
Loans, which are not signicant.
4.1. Robust analysis
In order to determine the robustness of our results, we re-
estimated the previous model by incorporating the changes in
the denition of bank performance shown in Table 5. Table 6 pre-
sents the robust results obtained for the proposed model in order
to explain the effect of board diversity on ROA, instead of Tobins
Q. The results for the models with the new bank performance var-
iable conrm those previously achieved. Specically, it is observed
that the presence of female directors positively affects bank prot-
ability, especially in environments with a higher level of investor
protection (coef. %WOMEN = 0.553).
Regarding the diversity of nationalities on the board, again a
negative impact of the presence of foreign directors on bank
performance is conrmed, represented by ROA (coef.
%FOREIGNERS = 0.278).
In addition, it is necessary to check if the results change when
several countries corporate governance characteristics are
controlled for (i.e. the non-duality requirement and two-tier vs.
one-tier). Table 7 reects the results obtained. It can be seen that
the effect of diversity is more homogeneous in our four subsam-
ples. More concretely, gender diversity always presents a positive
impact on Tobins Q, although it is quite reduced in countries with
non-requirements about separate functions between CEO and
board chairman. The presence of foreign directors has a negative
impact on bank performance in all models at a condent level of
99%.
4.2. Complementary analysis
In addition to the board of directors, the legal and institutional
environment and ownership structure can also serve as monitoring
mechanisms to reduce agency conicts and ease the governance
problem between investors and managers (Bathala and Rao,
1995; Mak and Li, 2001). Then, beyond our main purpose, we also
show the moderating effect of (i) investor protection and (ii) bank
regulatory regime on this previous relationship, analysing their
substitution or complementary roles.
According to La Porta et al. (2000), recent research has
documented large differences among countries in ownership con-
centration in rms, in the breadth and depth of capital markets,
in dividend policies, and in access to external nance. A common
element to the explanations of these differences is how well inves-
tors, both shareholders and creditors, are protected by law from
expropriation by the managers and controlling shareholders of
rms. Common law countries have the strongest protection of
outside investors, whereas civil law countries have the weakest
protection. Over time, these stylised dichotomous frameworks
have been rened to t the empirical realities better in different
countries (Aguilera and Jackson, 2003).
Although the ultimate benet of legal investor protection for
nancial development has been well documented, the effect of
investor protection on monitoring and advisory board roles has
received less attention and the effect is not clear. Consistent with
Doidge (2001), one alternative is that in countries with weak inves-
tor protection, additional charter provisions would not be enforced
and therefore rms would be powerless to independently improve
their monitoring of director roles. We would also expect that
where women and minorities are present on the corporate boards
of low-level investor protection countries, they are far more likely
to be found in non-executive positions and may be less likely to be
represented on key board committees. In this case, we should nd
that rm-level governance matters less in countries with weak
legal systems. Under this complementary effect, we would expect
diverse directors to perform better in countries with more protec-
tion of shareholder rights and stronger institutions.
On the contrary, the substitution alternative states that in coun-
tries with weak legal systems, investors would welcome even
small improvements in governance relative to other rms, in
which case we should nd that good governance matters more in
weak legal environments. Under this assumption, the private ben-
ets of control would be higher in countries with poor shareholder
rights and poor institutions (Beltratti, 2005). Then, it could be that
women and foreign directors take fewer risks in such countries to
protect their own interests, leading to better performance.
As a second complementary analysis, greater opacity in banks
makes controlling managers more difcult for bondholders,
208 E. Garca-Meca et al. / Journal of Banking & Finance 53 (2015) 202214

Table 5 Table 6
Explanatory model for Tobins Q. Explanatory models for ROA.

Model 1 Model 1
Coef. (Std. Err.) t (p-Value) Coef. (Std. Err.) t (p-Value)
%WOMEN 4.932*** 7.310 %WOMEN 0.553*** 12.400
(0.675) (0.000) (0.045) (0.000)
%FOREIGNERS 1.163 3.050 %FOREIGNERS 0.278*** 8.490
(0.381)*** (0.003) (0.033) (0.000)
BoardSize 0.049** 2.200 BoardSize 0.080*** 15.660
(0.022) (0.030) (0.005) (0.000)
%Indep 0.082** 1.940 %Indep 0.138*** 7.600
(0.042) (0.056) (0.018) (0.000)
Duality 0.457** 10.450 Duality 0.044* 1.740
(0.044) (0.000) (0.025) (0.085)
ActivityBoard 0.211** 11.430 ActivityBoard 0.015*** 18.830
(0.018) (0.000) (0.001) (0.000)
Commissions 0.956* 10.240 Commissions 0.102*** 12.870
(0.093) (0.000) (0.008) (0.000)
BankSize 2.667 7.790
BankSize 0.084*** 25.980
(0.342) (0.000)
(0.003) (0.000)
Loans 113.884 78.980
Loans 5.695*** 16.570
(1.442) (0.000)
(0.344) (0.000)
Z 626.95 (85)
Z 155.29 (91)
m1 1.16
m1 2.27
m2 1.00
m2 1.42
Hansen 62.98 (74)
Hansen 74.72 (74)
In order to avoid endogeneity problems for the numerical variables, we used their
In order to avoid endogeneity problems for the numerical variables, we used their
lags t  1 to t  2 as instruments.
lags t  1 to t  2 as instruments.
All models include control dummy variables for year and country.
All models include control dummy variables for year and country.
Notes:
Notes:

(i) Heteroskedasticity-consistent asymptotic standard error in parentheses.

(i) Heteroskedasticity-consistent asymptotic standard error in parentheses.
(ii) z is a Wald test of the joint signicance of the reported coefcients, asymp-
(ii) z is a Wald test of the joint signicance of the reported coefcients, asymp-
totically distributed as v2 under the null hypothesis of no relationship,
totically distributed as v2 under the null hypothesis of no relationship,
degrees of freedom in parentheses.
degrees of freedom in parentheses.
(iii) mi (m1 and m2) is a serial correlation test of order I (1 and 2) using residuals
(iii) mi (m1 and m2) is a serial correlation test of order I (1 and 2) using residuals
in rst differences, asymptotically distributed as N(0, 1) under the null
in rst differences, asymptotically distributed as N(0, 1) under the null
hypothesis of no serial correlation.
hypothesis of no serial correlation.
(iv) Hansen is a test of the over-identifying restrictions, asymptotically distrib-
(iv) Hansen is a test of the over-identifying restrictions, asymptotically distrib-
uted as v2 under the null hypothesis of no correlation between the instru-
uted as v2 under the null hypothesis of no correlation between the instru-
ments and the error term, degrees of freedom in parentheses.
ments and the error term, degrees of freedom in parentheses.

Q, the book value of total assets minus the book value of common equity plus the
Q, the book value of total assets minus the book value of common equity plus the
market value of common equity divided by the book value of total assets. %WOMEN,
market value of common equity divided by the book value of total assets. %WOMEN,
the percentage of female directors on the board. %FOREIGNERS, the percentage of
the percentage of female directors on the board. %FOREIGNERS, the percentage of
foreign directors on the board. BoardSize, the total number of directors on the board.
foreign directors on the board. BoardSize, the total number of directors on the board.
%Indep, the percentage of independent directors on the board. Duality is a dummy
%Indep, the percentage of independent directors on the board. Duality is a dummy
variable that takes the value one if the CEO is the chairman of the board and zero
variable that takes the value 1 if the CEO is the chairman of the board and zero
otherwise. ActivityBoard, the number of annual meetings of the board. Commissions,
otherwise. ActivityBoard, the number of annual meetings of the board. Commissions,
the number of board sub-committees. BankSize, the logarithm of total bank assets at
the number of board sub-committees. BankSize, the logarithm of total bank assets at
book value. Loans, the ratio of loans to total assets at book value.
* book value. Loans, the ratio of loans to total assets at book value.
Condence at the 90% level. *
** Condence at the 90% level.
Condence at the 95% level. ***
*** Condence at the 99% level.
Condence at the 99% level.

depositors, and shareholders (Levine, 2004). It also makes design-
ing contracts that align the interests of managers with those of
other stakeholders more difcult and makes it easier for insiders
to expropriate outside investors. In this scenario, bank regulation
plays a special role as an additional governance mechanism (de
Andrs et al., 2012). Although banks are highly regulated rms,
there are differences in the banking regulation systems all over
the world according to industry size; bank activity and ownership
restriction; ofcial supervisory power; prompt corrective action;
and deposit insurance design (Barth et al., 2006; Cihk et al.,
2012). Among the effects of these regulations is that they limit
the ability of bank managers to over-issue liabilities or divert
assets into high-risk ventures.
Adams and Ferreira (2008) note that the issue of whether regu-
lation substitutes for or complements governance remains an open
question. Some empirical research provides evidence that regula-
tion substitutes for traditional monitoring mechanisms (Kole and
Lehn, 1999; Becher et al., 2005; Caprio et al., 2007). In strict regu-
latory environments, regulators have the power to ne or dismiss
bank directors without trial or hearing and to require new board
elections be held. It could therefore be argued that if regulators
effectively provide subsidised monitoring and discipline, diverse
boards are not required to monitor diligently and effectively
(Hagendorff et al., 2008). Then, under high bank regulation, some
argue that monitoring would be easier due to fewer information
asymmetries. Under this assumption, the presence of high bank
regulation may substitute for traditional shareholder monitoring
 E. Garca-Meca et al. / Journal of Banking & Finance 53 (2015) 202214 209

Table 7
Robust models for Tobins Q: sample split.

Non-duality Duality Two-tier One-tier

Coef. (Std. Err.) t (p-value) Coef. (Std. Err.) t (p-value) Coef. (Std. Err.) t (p-value) Coef. (Std. Err.) t (p-value)
*** * *** ***
%WOMEN 100.574 37.880 0.011 1.920 1.773 3.600 97.610 6.390
(2.655) (0.000) (0.006) (0.070) (0.493) (0.001) (15.285) (0.000)
%FOREIGNERS 6.117*** 7.020 0.721*** 3.250 0.946*** 3.090 5.971*** 3.470
(0.872) (0.000) (0.222) (0.004) (0.306) (0.004) (1.721) (0.001)
BoardSize 6.943*** 6.500 0.009 0.200 0.026 0.110 19.369** 2.210
(1.068) (0.000) (0.046) (0.841) (0.247) (0.916) (8.745) (0.031)
%Indep 0.936*** 12.080 0.043 0.790 0.046 0.940 1.449*** 4.860
(0.077) (0.000) (0.054) (0.439) (0.050) (0.357) (0.298) (0.000)
Duality 0.044 1.440 1.052*** 7.910
(0.031) (0.161) (0.133) (0.000)
ActivityBoard 0.677*** 2.850 0.104 0.630 0.014 0.290 0.047 0.040
(0.237) (0.006) (0.164) (0.537) (0.048) (0.775) (1.142) (0.967)
Commissions 2.045** 2.320 0.063 0.650 0.393 0.620 0.921 0.230
(0.880) (0.023) (0.095) (0.520) (0.638) (0.542) (3.961) (0.817)
BankSize 0.487*** 11.910 0.293 0.530 0.030 0.220 0.116 1.470
(0.041) (0.000) (0.551) (0.601) (0.140) (0.831) (0.079) (0.148)
Loans 99.711*** 48.140 0.167 0.020 6.235** 1.970 115.870*** 11.280
(2.071) (0.000) (9.938) (0.987) (3.172) (0.058) (10.276) (0.000)
Z 632.04 (65) 1155.46 (83) 549.35 (32) 101.29 (52)
m1 1.16 0.88 1.00 1.08
m2 1.00 0.39 1.33 1.00
Hansen 56.10 (74) 15.80 (57) 17.50 (68) 38.14 (71)

In order to avoid endogeneity problems for the numerical variables, we used their lags t  1 to t  2 as instruments.
All models include control dummy variables for year and country.
Notes:

(i) Heteroskedasticity-consistent asymptotic standard error in parentheses.

(ii) z is a Wald test of the joint signicance of the reported coefcients, asymptotically distributed as v2 under the null hypothesis of no relationship, degrees of freedom
in parentheses.
(iii) mi (m1 and m2) is a serial correlation test of order I (1 and 2) using residuals in rst differences, asymptotically distributed as N(0,1) under the null hypothesis of no
serial correlation.
(iv) Hansen is a test of the over-identifying restrictions, asymptotically distributed as v2 under the null hypothesis of no correlation between the instruments and the
error term, degrees of freedom in parentheses.

Q, the book value of total assets minus the book value of common equity plus the market value of common equity divided by the book value of total assets. %WOMEN, the
percentage of female directors on the board. %FOREIGNERS, the percentage of foreign directors on the board. BoardSize, the total number of directors on the board. %Indep, the
percentage of independent directors on the board. Duality is a dummy variable that takes the value one if the CEO is the chairman of the board and zero otherwise.
ActivityBoard, the number of annual meetings of the board. Commissions, the number of board sub-committees. BankSize, the logarithm of total bank assets at book value.
Loans, the ratio of loans to total assets at book value.
*
Condence at the 90% level.
**
Condence at the 95% level.
***
Condence at the 99% level.

mechanisms by reducing the effect of board directors on
shareholder wealth.
On the contrary, according to Becher and Frye (2011),
regulation and governance are complements, and their results
are consistent with the notion that regulators pressure rms to
adopt effective monitoring structures that promote safety and
soundness. Then, if a complementary relationship exists between
corporate governance and regulation, more diverse boards would
be more effective in a stricter regulatory environment. Mahoney
(2001) argues that regulation should not be understood as a nar-
row set of rules, but more broadly as governments signalling
their intent about good practice as well as commitment to
enforce. Joskow et al. (1993) note that regulation increases the
visibility of corporate governance through enhanced public scru-
tiny and provides a set of instruments (price and allowable cost
decisions) to penalise rms with poor governance structures.
Barth et al. (2004) also suggest that government policies that
rely on guidelines that foster incentives for private agents to
exert corporate control work best to promote bank development,
performance, and stability. Therefore, it could be argued that
even when regulators do not stipulate levels of board diversity
(or other governance arrangements), their presence will still
coerce regulated rms into adopting effective governance struc-
tures (Becher and Frye, 2011). In this line, Adams and Ferreira
(2008) contend that regulators view board oversight as an
important complement to supervision rather than as a
substitute.
According to Barth et al. (2004), analyses of individual regula-
tions and supervisory practices in banks should incorporate inter-
action terms to assess the efcacy of each one in the presence of
others. Then, although the potential inuence of bank regulatory
restrictions on bank value is an open question, it may be compat-
ible with the inuence of board diversity on bank performance. If
bank regulation pressures rms to adopt effective monitoring
structures, the monitoring levels of diverse directors should be
higher in highly regulated banks.
In brief, we propose two complementary analyses in order to
explain the role of board diversity on performance in different
210 E. Garca-Meca et al. / Journal of Banking & Finance 53 (2015) 202214
institutional settings characterised by the level of investor protec-
tion and bank regulation exigencies.
We are interested in the role of female and foreign directors in
each system of investor protection and in different banking sector
characteristics. In this respect, we add the interactions %WOMEN*IP
and %FOREIGNERS*IP to create Model (1a) and %WOMEN*BR and
%FOREIGNERS*BR for model (1b). The remaining independent and
control variables are the same as in the previous model:
Q ==ROAit b0 b1 %WOMENit b2 %FOREIGNERSit
b3 %WOMEN IPit
b4 %FOREIGNERS IP it b5 IP
b6 BoardSizeit b7 %Indepit
b8 Dualityit b9 Activ ityBoardit
b10 Commissionsit b11 BankSizeit
X
b12 Loansit bj Countryi
X
bk Year t gi lit Model1a
Q ==ROAit b0 b1 %WOMENit b2 %FOREIGNERSit
b3 %WOMEN  BRit
b4 %FOREIGNERS BRit b5 BR
b6 BoardSizeit b7 %Indepit
b8 Dualityit b9 Activ ityBoardit
b10 Commissionsit b11 BankSizeit
X work where institutional differences are outstanding.
b12 Loansit bj Countryi
X
bk Yeart gi lit Model1b
The measures of the moderating variables of the proposed rela-
tionship are listed in Appendix 1. The rest of the variables were
explained in our previous model.
Table 8 summarises the results of these complementary analy-
ses. Concretely, in Model (1a), we analyse the moderating effect
that the level of investor protection has on board diversity. The
results obtained show the same effect of the %WOMEN and %FOR-
EIGNERS variables on Q as in the previous model, regarding sign
and signicance. %WOMEN*IP presents a positive effect on Tobins
Q (coef. 28.282), statistically signicant at the 99% condence level,
while %FOREIGNERS*IP has a negative and signicant effect at 90%
(coef. 1.343). It can thus be afrmed that female directors in
countries with lower levels of investor protection show a more
limited impact on corporate performance (coef.
%WOMEN = 74.874) than those who serve in environments with a
greater concern for the defence of shareholder interests (coef.
%WOMEN + coef. %WOMEN*IP = 74.874 + 28.282 = 103.156).
In the case of foreign directors, their impact on bank perfor-
mance is negative across all environments, but it is particularly
negative in those with higher levels of investor protection (coef.
%FOREIGNERS = 3.748 vs. coef. %FOREIGNERS + coef. %FOREIGN-
ERS*IP = 3.7481.343 = 5.091). Therefore, the impact of women
and foreigners on protability is wide in environments with higher
levels of investor protection. Concretely, our ndings support the
complementary hypothesis proposed by Doidge (2001) that the
presence of diverse directors on boards is particularly strong in
countries with more protection of shareholder rights and stronger
institutions. Nonetheless, this benecial effect is only supported
for women directors since foreigners negatively affect bank
performance.
The results for Model (1b), where we analyse the moderating
effect that banking regulation exerts on board diversity, are similar
to those for the investor protection model. We observe a positive
and signicant effect at 99% of %WOMEN (coef. 11.172) and a neg-
ative effect at the same signicance of %FOREIGNERS (coef.
238.965). The interaction of both variables with the level of bank-
ing regulation (BR) supports these results. Concretely, %WOMEN*BR
and %FOREIGNERS*BR have a positive and negative effect, respec-
tively, both statistically signicant at 99% (coef. 9.821 and coef.
305.625, respectively).
It can be observed that female directors in countries with less
stringent regulations have a more limited impact on bank
performance (coef. %WOMEN = 11.172) than those who serve in
environments with stronger banking regulation (coef. %WOMEN + -
coef. %WOMEN*BR = 11.172 + 9.821 = 20.993). In the case of foreign
directors, their presence on boards negatively inuences bank per-
formance, especially in those environments with more stringent
regulations for the banking sector (coef. %FOREIGNERS = 238.965
vs. coef. %FOREIGNERS + coef. %FOREIGNERS*BR = 2.390
3.056 = 5.446).
5. Concluding remarks
The aim of this research was to improve our understanding of
gender and nationality diversity on corporate boards in an interna-
tional sample of banks from Canada, France, Germany, Italy, the
Netherlands, Spain, Sweden, the UK, and the US. The availability
of data for a number of countries allows us to broaden our analysis
to a wider basis than the Anglo-Saxon area to which most previous
research is limited. This led us to understand to what extent the
efciency of board diversity in banks can be generalised in a frame-
Our results provide encouraging evidence that gender and
nationality diversity on boards affect performance. However,
women and foreign minorities have different backgrounds and dif-
ferent human capital, which results in different effects on bank
returns. Thus, although some papers suggest that a more diverse
board provides more valuable resources, which should improve
rm performance, this paper conrms that in banks the type of
diversity seems to be important.
Foreign directors have a negative effect on bank performance.
The underlying intuition is that foreign minority directors may face
strong domestic networks and may also encourage managers to
increase shareholder returns through greater risk-taking because
they do not internalise the social costs of nancial institution fail-
ures. In addition, demographic differences lower social cohesion
between groups, and these social barriers reduce the probability
that minority viewpoints inuence group decisions. This leads for-
eign directors to a minority position that slows the decision pro-
cess and makes it more conicting, ultimately reducing bank
performance.
On the contrary, the presented gender diversity ndings con-
rm the positive role of female directors on bank performance.
Our results suggest that the presence of women on bank boards
improves governance, which causes the bank to be more protable.
This nding also suggests that women directors are not substitutes
for traditional corporate directors with identical abilities but rather
that qualied women directors have unique characteristics that
create additional value in banks.
The analyses of different countries allow us to consider the
effect of the characteristics of the banks regulatory environment
as well as the different levels of investor protection, which deter-
mine the effectiveness of corporate governance mechanisms. In
addition to board diversity on performance, complementarily,
the empirical evidence of this study shows that the negative
effect of nationality is particularly high in countries with superior
levels of investor protection and bank regulation. The explicit
protections and guarantees granted to banks and the implicit
bailout safeguards in countries with higher regulations and pro-
tection from governments may also intensify the insurance that
 E. Garca-Meca et al. / Journal of Banking & Finance 53 (2015) 202214 211

Table 8
Explanatory models for Tobins Q.

Model 1a Model 1b
Coef. (Std. Err.) t (p-value) Coef. (Std. Err.) t (p-value)
%WOMEN 74.874*** 17.860 11.172*** 3.90
(4.192) (0.000) (2.867) (0.000)
%FOREIGNERS 3.748*** 4.850 2.390*** 22.69
(0.773) (0.000) (10.532) (0.000)
%WOMEN*IP 28.282*** 14.800
(1.911) (0.000)
%FOREIGNERS*IP 1.343*** 2.630
(0.511) (0.010)
IP Dropped

%WOMEN*BR 9.821*** 3.55

(2.766) (0.001)
%FOREIGNERS*BR 3.056*** 24.55
(12.449) (0.000)
BR Dropped

BoardSize 0.005 0.080 0.307*** 5.29

(0.057) (0.936) (0.058) (0.000)
%Indep 0.256** 1.700 0.408*** 16.20
(0.150) (0.093) (0.025) (0.000)
Duality 0.512*** 9.450 0.278** 2.31
(0.054) (0.000) (0.120) (0.023)
ActivityBoard 0.169*** 7.510 0.675*** 2.67
(0.023) (0.000) (0.025) (0.009)
Commissions 1.381*** 8.060 0.798*** 4.71
(0.171) (0.000) (0.169) (0.000)
BankSize 3.895*** 11.800 4.615*** 6.41
(0.330) (0.000) (0.720) (0.000)
Loans 108.602*** 87.880 96.202 33.81
(1.236) (0.000) (2.846) (0.000)
Z 395.48 (85) 1019.46 (85)
m1 1.16 1.15
m2 1.00 0.97
Hansen 71.45 (72) 57.98 (72)

In order to avoid endogeneity problems for the numerical variables, we used their lags t  1 to t  2 as instruments.
All models include control dummy variables for year and country.
Notes:

(i) Heteroskedasticity-consistent asymptotic standard error in parentheses.

(ii) z is a Wald test of the joint signicance of the reported coefcients, asymptotically distributed as v2 under the null hypothesis of no relationship, degrees of freedom
in parentheses.
(iii) mi (m1 and m2) is a serial correlation test of order I (1 and 2) using residuals in rst differences, asymptotically distributed as N(0, 1) under the null hypothesis of no
serial correlation.
(iv) Hansen is a test of the over-identifying restrictions, asymptotically distributed as v2 under the null hypothesis of no correlation between the instruments and the
error term, degrees of freedom in parentheses.

Q, the book value of total assets minus the book value of common equity plus the market value of common equity divided by the book value of total assets. %WOMEN, the
percentage of female directors on the board. %FOREIGNERS, the percentage of foreign directors on the board. IP is the level of investor protection in each country. BR is the level
of bank regulation in each country. %WOMEN*IP and %FOREIGNERS*IP represent the role of female and foreign directors (respectively) at different levels of investor protection.
%WOMEN*BR and %FOREIGNERS*BR represent the role of female and foreign (respectively) directors at different levels of banking regulation. BoardSize, the total number of
directors on the board. %Indep, the percentage of independent directors on the board. Duality is a dummy variable that takes the value one if the CEO is the chairman of the
board and zero otherwise. ActivityBoard, the number of annual meetings of the board. Commissions, the number of board sub-committees. BankSize, the logarithm of total bank
assets at book value. Loans, the ratio of loans to total assets at book value.
**
Condence at the 95% level.
***
Condence at the 99% level.

leads foreign directors to moral hazard and reduce their monitor-
ing incentives. Meanwhile, the ability of a gender-diverse board is
particularly important in those banks located in countries with
high investor protection levels. Thus, gender diversity is positively
associated with performance in countries with a common law
legal tradition, higher ease with which investors can exercise
their rights against opportunistic behaviour, and higher legal
enforcement. Similarly, the positive effect of female directors is
stronger is banks located in countries with a strong banking
industry, conrming the assumption that regulators view board
oversight as an important complement to supervision rather than
as a substitute. Overall, the results provide evidence that investor
212 E. Garca-Meca et al. / Journal of Banking & Finance 53 (2015) 202214

protection and bank regulation are complementary mechanisms Table 9

for board diversity. Factorial analysis for investor protection.

One of the important practical implications of our results is that IP

the decision to appoint foreign minorities to bank boards should be Com_Law 0.891
based on criteria other than the future nancial performance of the Anti-Dir 0.833
rm. Nevertheless, our evidence does support public policy EJS 0.928
initiatives for quotas of women on corporate boards based on the RL 0.703
Corrup 0.762
premise that gender diversity improves nancial performance,
especially in those banks located in countries with high investor Variance accounted for = 68.48%
KMO measure of simple suitability 0.589
protection and strong bank regulation. Bartlett test of sphericity (Chi-square) 64.784
p-Value 0.000

Acknowledgement

We acknowledge nancial support from the Research Agency of anisms is the true determinant of protecting the rights of investors
the Spanish Government (Project ECO2011-29144-C03-02). because they determine the liability of the managers and adminis-
trators of companies (La Porta et al., 1998). Finally, the corruption
index Corrup deals with the governments stance towards business
Appendix 1. Moderating variables measures
and identies corruption in government. It is an index ranging
from zero to ten representing the average of an investors assess-
A.1. Investor protection measure
ments of corruption in the government in each country. Lower val-
ues of this index identify higher corruption problems.
The indicator IP represents the level of investor protection by
Other similar indexes have been used by Beltratti et al. (2010),
country. It quanties the explicit protection awarded to sharehold-
who adopt the country-level indicators of Kaufmann et al. (2005).
ers and creditors for fraud and bankruptcy as well as the quality of
These indicators are obtained from combining several hundred
law enforcement. Chong and Lpez-de-Silanes (2007), among oth-
individual variables measuring political stability, government
ers, postulate that investor protection should be dened from tra-
effectiveness, regulatory quality, the enforcement of the rule of
dition and the existence of laws that guarantee investors interests
law, corruption, and the extent to which a countrys citizens are
and the characteristics of the judicial institutions to ensure their
able to participate in selecting their government.
implementation and enforcement, as the legal reinforcement of
Finally, with the aim of achieving the IP variable, we conduct a
the rules and laws have the power to stop, or at least limit, the
factorial analysis to add the information of previous indicators. The
expropriation of investors. Therefore, following previous studies
results are summarised in Table 9. The KaiserMeyerOlkin (KMO)
such as Leuz et al. (2003), IP, which captures a countrys legal envi-
measure of sample suitability is 0.589, higher than 0.5, and the
ronment in protecting investor rights, consists of various indica-
Bartlett test of sphericity is signicant at the 99% condence level,
tors. These represent the legal tradition of the legal systems of
meaning that the results obtained provide an adequate basis for
each country (Com_Law), legal mechanisms of investor protection
the empirical examination of the factorial analysis (Hair et al.,
(Anti_Dir), and three legal system parameters: the efciency index
1998).
of the judicial system (EJS), law and order index (RL), and corrup-
The only factor obtained (i.e. IP) explains 68.48% of the variance
tion index (Corrup).
of the ve indicators that represent the level of investor protection:
The rst variable of investor protection, Com_Law, is the legal
Com_Law, Anti_Dir, EJS, RL, and Corrup. The charges of each indica-
tradition and this is coded by a dummy variable that takes a value
tor in the nal factor are listed in the rst part of the table. EJS
of one for countries with a common law legal tradition and a value
(0.928), which represents the efciency of the judiciary index, is
of zero otherwise. At a second level, investor protection is the com-
the indicator with the highest charge, followed by the Com_Law
mercial law and, particularly, the legal mechanisms that protect
(0.891) and Anti_Dir (0.833). The last two indicators, the index of
investors, mitigating the agency problems that may occur with
law and order in the country (RL) and the index of government cor-
them. La Porta et al. (1998) develop an anti-director rights index
ruption (Corrup), have charges above 0.7, as can be seen in Table 9.
based on the presence/absence of six specic elements of investor
protection. Specically, Anti_Dir uses six values to measure the
ease with which investors can exercise their rights against oppor-
tunistic behaviour. A.2. Banking regulation measure
The third level of protection is based on the existence of other
legal system parameters (Deffains and Guigou, 2002) such as Following de Andres and Vallelado (2008), the characteristics of
mechanisms for monitoring compliance with existing regulations,
the banking industry in each country are dened by different vari-
because this can mitigate the companys ethical problems. In this ables, obtained from Barth et al. (2006) and Cihk et al. (2012):
sense, Durnev et al. (2004) observe that the strength of the control
mechanisms of compliance is more efcient than the mere exis- Table 10
tence of a comprehensive set of laws governing the same. To reect Factorial analysis for the characteristics of banking industry.

the mechanisms of law enforcement, we use the three indexes pro- BR

posed by La Porta et al. (1998) to assess the legal framework of a IndSize 0.914
country: (i) the level of efciency of the judiciary; (ii) the law BAOR 0.941
and order index; and (iii) an index of the quality of accounting OSP 0.634
standards. The judicial efciency index (EJS) identies the indepen- PCA 0.952
DID 0.746
dence and professionalism of the judiciary in all types of processes
and the temporal adequacy of processes, especially regarding the Variance accounted for = 71.72%
KMO measure of simple suitability 0.692
reasonableness of the delay. The law and order index, RL, is related
Bartlett test of sphericity (Chi-square) 5150.324
to the general and non-arbitrariness of the rules, its comprehen- p-Value 0.000
siveness, equity, and so on. The compliance of both control mech-
 E. Garca-Meca et al. / Journal of Banking & Finance 53 (2015) 202214
(i) Industry size (IndSize), measured by the bank assets over
GDP;
(ii) Bank activity and ownership restrictiveness (BAOR), mea-
sured by the overall degree to which banks are permitted
to engage in securities, insurance, and real estate activities
and the extent to which they can own non-nancial rms.
This variable takes values between one and four the lowest
value represents no restrictions are placed on this type of
diversication by banks and the highest value indicates that
such diversication is prohibited;
(iii) Ofcial supervisory power (OSP) represents whether ofcials
have the authority to take specic actions to prevent and
correct problems. This variable ranges from zero to 16
the higher the value, the more power ofcials have;
(iv) Prompt corrective action (PCA) measures whether laws
establish predetermined levels of bank solvency that force
action by authorities. This variable takes values from zero
to six a higher value indicates greater promptness to
respond to problems; and
(v) Deposit insurance design (DID) takes the value of one if it
has a limit by person, two if the limit is by account, and three
if it has both limits.
Finally, with the aim of achieving the necessary variable to cre-
ate previous interactions, we conduct a factorial analysis to add the
information of the ve variables. The results are summarised in
Table 10. The KMO measure of sample suitability is 0.692, higher
than 0.5, the minimum variable of suitability and the Bartlett test
of sphericity is signicant at the 99% condence level. This means
that the results of the factorial analysis provide an adequate basis
for the empirical examination (Hair et al., 1998). The factorial anal-
ysis results in one factor, BR, which denes the strength of the
banking industry characteristics across countries. All variables
have a positive charge on the factor, except IndSize, which has a
negative effect.
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