Question 2
1. If I understand this regulation correctly, there are two components to the disclosure. First, firm need to disclose whether they have policy on diversity matters. Second, firms with diversity policy need to disclose how they implement the policy and asses its effectiveness.
a. We can simply look at whether public firms have diversity disclosures after Feb 28th 2010. We can go through their SEC filings.
b. Exec Comp has detailed data on board member. We can compare gender, racial and ethnic diversity before and after the diversity disclosures mandate.
c. We can look at firms’ return when they file diversity disclosures. If diverse boards are benefiticial then we should see a positive return. We can also test different depdent
…show more content…
Firms choose their board based on business needs and firms characteristics. For example, a chemical firm is more likely to have more technical people on board in order to evaluate manger’s performance and R&D budgets. We can use the exogenous increase in the number of female member on the board to eliminate the endogenity. I recall one European country has this regulation before.
3. Rich always says, “things exists by efficiency” in class. If the current board that firms have is the most efficient outcome, then replacing some board members might be inefficient for some firms. For example, BuildABear has many female board members because females spend more time with their kids and know more about the demand. Replacing the current board member with a male who does not have any kids might not benefit the firms in terms of judging market condition and manager’s budget proposals. The disagreement in the board is not efficient.
4. There is no clear direction in how diversity disclosures affect firms’ value. The reaction should not be uniform for all types of firms. If diverse board is beneficial because they are more independent from the managers, or are more open-minded to different opinions, or have more comprehensive views then we should wee a positive reaction to diversity disclosures. Firm’s business condition such as sales volatility, information environment, segments of business all affect the investor