Board Capital Diversity as a Governance Mechanism: Evidence From Latin America

Abstract

Abstract This paper analyzes the effects of board capital as a corporate governance mechanism on firm performance in the context of a weak legal regime for investor protection. The study focuses on Latin America as a representative emerging market that includes a dataset of 442 firms in six countries (Argentina, Brazil, Chile, Colombia, Mexico, and Peru) from 2001 to 2012. We measure board capital as a composite index of directors’ educational attainment and professional experience. We find a positive relationship with differential effects between board capital and firm performance within weak firm internal governance schemes such as firms with low board independence, dual roles as firm CEOs and COBs, and low blockholder contestability. With respect to country-level governance standards, we find that improvements in the country’s regulatory quality, the rule of law, and corruption control reduce the need for firm board capital as an internal governance mechanism.