How age diversity on the Board of Directors affects Firm Performance

Sammanfattning: A great number of studies have shown that the composition of the board of directors can have a significant impact upon firm performance. Early studies on board composition focused on factors such as independence of directors, with the impact of cognitive diversity in decision making gaining recognition only in the last few years. Recent diversity studies have focused on gender diversity with interesting but mixed results. We further explore the relationship between diversity and firm performance by studying the companies listed on the OMX Stockholm exchange between 2005 and 2009. Proportionally selecting one third of companies and every other year - total sample size of 258 measurements - we performed regression analysis of the effects of age diversity on the board (given by standard deviation of ages) upon financial and market performance (given by ROA and Tobin‟s Q respectively). The analysis tested whether age diversity on the board improved firm performance, whether the effects were greater in small firms, and whether nonlinear “diminishing returns” appeared in situations with very high board diversity. As other studies have shown that board size, director tenure and gender diversity can all affect performance, we control for these factors as well as for mean director age, industry and firm size. After discovering that our metrics, ROA and Tobin‟s Q, do not correlate for small and medium size firms, but only for large firms with a market cap above EUR 1 billion, we argue that ROA is a better measurement of firm performance. We found that age diversity significantly affects firm performance as measured by ROA, but not as measured by Tobin‟s Q. We further found that the effects are only evident when the company belongs to the small-cap category with a market cap below EUR 150 million. The size of the effect differs depending on what measurement years are included in the analysis, and how long the time delay is between the measurement of age diversity and firm performance. We found that the effect of age diversity is slightly lower for ROA measured during the same year, compared to ROA measured two years later. Finally, our data did not support conclusions either way as to diminishing returns occuring in situations of extremely high age diversity, as too few such firms were found in the sample. In light of these findings, age diversity should be given equal weight to other considerations when composing a successful corporate board in small firms.