This study examines the relationship between board diversity and firm’s performance in the developing financial market. The studies relevant to the developing market show inconsistent findings regarding board diversity and firm value relationship. The study seeks to fill this gap in the literature by using the panel data of 20 commercial banks listed on Karachi Stock Exchange (KSE), Pakistan for the years 2007 to 2012. The results suggest that a higher proportion of female and young board of directors leads to lower firm value. On the other hand, higher representation of foreign directors improves the firm value as measured by Tobin’s Q. Therefore, to take advantage of this finding, the board of directors should include trained and mature female, foreign and qualified young directors. The results related to control variables suggest that board size does not play any role in affecting the firm value, whereas the value of firm decreases with an increase in the firm size. Finally, market capitalization and price-to-book value ratio of the firm play a positive role in affecting the shareholder’s value in the selected market.

The Board of Directors are responsible for the protection of shareholders’ rights by ensuring that the interests of managers and shareholders are aligned in the same direction, and they also have to monitor the managers in order to avoid agency conflicts (Kang et al., 2007). A large number of boards follow the corporate governance principles and practices to improve their effectiveness even in the absence of external corporate governance instruments like government regulations and blockholders monitoring. The directors are viewed as assets because they have skills, experience, knowledge, judgment, and expertise that are important to meet the needs of the firm (Scarborough et al., 2010). Diversity is one of the current problems faced by the firms and is related to the age, gender and independence of directors (Rhode and Packel, 2010). In corporate governance, board diversity is defined as the board composition of the qualities, characteristics, properties, skills, and expertise of individual members that help to make decisions in the board. Demographic diversity in the board affects the nomination process of directors, compensation system and also the incentives for directors for replacing the CEO. Furthermore, diversity affects the firm performance, but it depends on the firm’s characteristics. Finally, board diversity results in costs and benefits for the firm (Ferreira, 2010). There are wide and different views about the relationship between board diversity and firm performance.

Corporate Governance Journal, Relationship, Board Diversity, Firm Performance, Evidence, Banking Sector, Karachi Stock Exchange (KSE), Pakistan.