Board Diversity and Risk Management: Impact on Disclosure Quality and Cost of Capital in the Financial Sector
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Abstract
This study examines the role of board diversity in risk management
and its impact on the quality of risk disclosure and the cost of capital
in financial institutions. Using a panel-based quantitative-empirical
design (2019–2025), this study develops two key constructs: a multidimensional
Board Diversity Index (BDI) (demographic: gender,
age, nationality; and functional: risk/audit/compliance expertise,
IT/data security, risk committee, frequency of risk meetings) and a
Risk Disclosure Quality Index (RISQ) that assesses substantive
content (exposure specificity, limits and risk appetite, quantitative
metrics such as PD/LGD/VaR, scenarios/stress, and linkages to
capital and strategy). The impact on the cost of equity capital (COE)
and the cost of debt (COD) is estimated using panel regression (firm
& year fixed effects), mediation tests (bootstrap/SEM), and robust
tests (alternative proxies, winsorizing, index redefinition). The
results show that IKD has a positive effect on IKPR, mainly through
the dimensions of functional expertise and strengthening board
processes (committees & risk agenda). Furthermore, IKPR is
negatively associated with COE and COD, indicating a decrease in
information asymmetry and risk premium. The direct effect of IKD
on the cost of capital is smaller than the mediation channel through
IKPR, confirming the mechanism: board diversity → increased
disclosure quality → decreased cost of capital. Heterogeneity
analysis shows a stronger effect in high-risk environments,
emphasizing the role of materiality. The research's primary
contribution is a risk-capability-oriented measure of board diversity
and an assessment of the quality of auditable disclosures, beyond
quantitative measures. Practical implications recommend
strengthening board composition (risk/audit/compliance, IT
expertise), institutionalizing risk committees and agendas, and
focusing on specific, measurable disclosures linked to capital and
strategy.
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Board Diversity and Risk Management: Impact on Disclosure Quality and Cost of Capital in the
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