PhD Defence: Beneath the Surface of the Corporation

On Wednesday 21 May, at 4 pm., Oussama El Moujahid will defend his PhD thesis Beneath the Surface of the Corporation: Board Diversity, Firm Ownership, Firm Technology, and Corporate Risk Management.

Foreign equity owners take more active stance and are more involved in corporate governance compared to local investors. With the premise that (large) foreign owners can affect governance provisions – including the composition of the board of directors – they are also likely to influence board cultural diversity.

The board diversity literature suggests that culturally diversified boards add value to governance by bringing different skills, talents, capabilities, international experiences, and various occupational and social perspectives to the boardroom. Culture matters when determining corporate policies, by influencing for instance a firm’s perceptions of costs and risks. A culturally diversified board has the power and incentives to develop enhanced risk-management-related strategies and mechanisms that imply the use of derivative instruments for hedging purposes, thereby contributing to creating a healthier and more stable corporate environment.

Cutting edge technologies are also strongly believed to build firm resilience by providing shelter to investors against trail risk events. Artificial Intelligence (AI) – the key driver of the 4^th industrial revolution and a General-Purpose Technology (GPT) that can be leveraged transversally across business segments and sectors – is being increasingly integrated by corporations into their business operations and business models.

Oussama El Moujahid’s dissertation comprises three empirical investigations on this terrain.

AI adoption and firms’ resiliency to crises

The first research investigates the role of AI adoption on firms’ resiliency to crises, notably the COVID-19 pandemic. The results show that firms that adopted AI technologies at least two years before the crisis exhibited better stock performance during the peak of the crisis than non-AI adopters. The main findings are driven by AI adopters that innovate through the acquisition of AI patents, consistent with the literature showing that innovations, such as AI, add value to a firm only when there is a coherence between AI and the firm’s knowledge base measured by patenting.

The research also demonstrates that heterogeneity in AI adoption matters as the main result is primarily driven by three AI technology types: machine learning, natural language processing, and virtual assistants. Some AI components are considered to be more important than others. Machine learning for instance, is regarded as a GPT and as a ‘method of invention’. During the COVID-19 pandemic, the access to data may have become even more crucial than in normal times, and firms deploying the computational power of machine learning may have benefited from a superior comparative advantage compared to their counterparts in predicting demand patterns and improving the performance of marketing operations.

Foreign ownership and board cultural diversity

The second empirical investigation examines the relationship between foreign ownership and board cultural diversity. The research reveals that foreign ownership is positively associated with board cultural diversity. Foreign owners on the nomination committees is the channel through which foreign owners promote board cultural diversity. The research further shows that cultural diversity promoted by foreign owners is not associated with higher firm value or other diversity aspects, which suggests the ‘homophily’ phenomenon – that is, the tendency of individuals to associate, interact, and bond with others with similar characteristics and backgrounds –  as the root cause of these diversity preferences.

Knowledge, skills, and sophistication in the use of financial instruments

In the third investigation, El Moujahid shows that board cultural diversity positively affects the decision to hedge using derivatives, and the hedging strategies. He argues that foreign directors may bring more knowledge, skills, and financial sophistication to the boardroom about using financial instruments. The empirical investigation further provides robust evidence that the combined effect of derivatives usage and board cultural diversity increases firms’ performance. The results align with relevant theories on corporate hedging.

Oussama El Moujahid is Plenipotentiary Minister at the Moroccan Ministry of Foreign Affairs and a PhD student at Utrecht University School of Economics (U.S.E.).