The Clash of Cultures and Its Effect on Firm Performance Volatility

Owing to the recent public pressure to increase diversity on boards, firms increasingly employ foreign nationals as board of directors and/or Chief Executive Officers. As the employees, investors, and other stakeholders are mostly local, how would they interact with a foreign CEO and/or board of directors? More importantly, how would this interaction among a multiplicity of cultures affect performance volatility? Whilst the cultural impact on firm outcomes has remained in the spotlight for the last decade or so, the interaction of a multiplicity of cultures within a firm and its impact on corporate outcomes is generally understudied. We employ 1190 firms from 12 European countries, over 14 years from 2005 to 2018, and by using both feasible generalized least squares (FGLS) and quantile panel regression methods, we find that a higher cultural difference between the CEO and the board of directors would result in reduced stock performance volatility and that this association is more prominent in moderately volatile firms. In contrast, a higher cultural difference between the CEO and firm’s stakeholders would result in miscommunication and misunderstandings and a disarray of preferences that would lead to the CEO making unpredictable decisions, exhibited by increased performance volatility. The misunderstandings and miscommunications are aggravated in highly volatile firms. Our results remain robust to alternative specifications and endogeneity concerns. We believe that this chapter is among the first to investigate the co-existence of a multiplicity of cultures within a firm and its impact on firm performance volatility.