Unravelling the Impact of Ideological Diversity on Stock Returns Amidst Uncertainty

Abstract

Recently, the Covid-19 uncertainties have raised interest in identifying factors that influence firms’ resilience. Existing Covid-19 research primarily focused on market reactions and lockdown impacts, overlooking the influence of ideological diversity of firms’ directors on resilience. To address this gap, we examine personal contributions to the US Republican or Democratic parties by 11,741 directors from 328 S&P 500 firms, revealing their political ideologies. Our findings highlight that firms with diverse boards experience milder stock return declines during the Covid-19 outbreak, indicating a positive link between ideological diversity and firm performance. This study presents evidence of the significant impact of ideological diversity in corporate boardrooms, showcasing how it affects firms’ resilience during times of extreme market uncertainty. Our findings emphasise the importance of revisiting the theories to explain the ideological diversity in shaping strategies to respond to uncertainty during unpredictable times. Based on social psychological theory alongside agency theory, the findings provide clear indications to practitioners that during future uncertainties, the ideological diversity of the board should be considered to optimise the board's potential to improve performance.