Religion diversity of firm boards and financial performance:the mediating role of debt policy

Abstract

This study examines the impact of board religion diversity in a highly religious context on financial performance and its resultant consequences. Furthermore, it investigates the role of debt policy as a mediator in the association between board religion diversity and financial performance. This study uses a sample of 70 sharia-based companies indexed in the Jakarta Islamic Index (JII70) covering the period 2019 to 2021. Data was extracted from publicly available company data and other sources to obtain 210 observational data. To test the hypothesis, this study uses GLS random effect regression panel data analysis. Our empirical findings show that board religion diversity has a positive impact on market-based firm performance (Tobin's Q) but not on accounting-based performance (ROA). In addition, when religion diversity is at the optimal level, it also shows a significant effect on market performance, in contrast to previous studies that show U-curve results. Finally, this study finds a mediating role of debt policy on the relationship between board religion diversity and financial performance, especially affecting market-based firm performance. Our findings remain robust across a number of robustness tests. Our findings offer empirical support for the role of diverse board characteristics, particularly religion diversity, in influencing firm performance and highlight the mediating role of debt policy mediates in the process