Does foreign institutional ownership mediate the nexus between board diversity and the risk of financial distress? A case of an emerging economy of China

The study aims to empirically analyze the effect of board diversity measurement in demographic diversity (i.e., age, gender, and nationality) and cognitive diversity (i.e., education, financial expertise, and tenure) dimensions on the probability of financial distress in an emerging market, China. Additionally, evaluate whether foreign institutional ownership mediates between board diversity and financial distress nexus. Distinctly, the fixed-effects of panel regression method are employed to examine a sample of 13,740 firm-year observations covered from 2009 to 2018. The study reveals that board diversity reduces financial distress likelihood, and foreign institutional ownership mediates this relationship. Further, applied two-stage GMM to resolve the possible endogenous problem, and the robust models also verified the results. First, the study findings contribute particularly in the Chinese context that board diversity is positively associated with financial distress, suggesting that diverse boards are helpful to reduce financial distress likelihood. Second, foreign ownership is attracted through the improved board diversity. Third, foreign ownership has a substantial impact on shaping the board diversity’s effect on the likelihood of financial distress. The study findings are novel and imply that firms having diverse boards attract foreign institutional ownership by reducing asymmetric information. Subsequently, foreign institutional investors are helping to reduce financial distress likelihood.