Dunhong Jin (Hong Kong University Business School)
Title:
Board Diversity and Rare Disasters Risk Insurance
Abstract:
About 37% of Chinese listed firms have medical expertise, as measured by the existence of senior executives with a medical degree or medical-industry experience. Using the COVID-19 outbreak in China as a natural experiment, we find that stock returns of firms with medical expertise, excluding those within the healthcare and pharmaceutical industry, are significantly higher than firms without. This effect has a similar effect that financial variables such as leverage, short-term debt, and cash have on the stock price. The positive impact is more pronounced if a CEO or Chairman has medical expertise and if the firm is not state-owned, or when the firm is located in a place with higher infection rates or with fewer public health resources. To shed light on the underlying mechanisms, we also show that senior executives with medical backgrounds enable their firms to react strategically. They have a more conservative attitude toward the pandemic and advise their firms to hoard more cash. Overall, through disentangling macro shocks, this study underlines the importance of diversified executive human capital on firm performance. Even though this diversity does not seem to increase firm value in normal times, it has the potential to insure the firm against rare disaster risks.