The Effects of International Board Diversity on Working Capital

Abstract

By focusing on working capital ratios, this paper examines the impact of international board diversity on the firm's working capital. This study is based on an S&P 1500 index sample of 13,716 firm-year observations drawn between 2005 and 2025. The findings show that the presence of international directors on corporate boards reduces working capital ratios. The results are robust to a battery of empirical tests, including a novel instrumental variable test of the first pronoun drop in the languages spoken in the county where the corporation is headquartered. In addition, we find that the channel by which board international diversity impacts working capital holdings is the institutional collectivist culture of the directors' home country. This finding is consistent with Cushion Theory, which assumes that culturally collective societies tend to take higher risks than individualistic ones.