The purpose of this paper is to establish the effect of top management team (TMT) cultural diversity on firm performance with a framework that considers such an effect from both cost and benefit perspectives. The paper also examines whether and how diversity management mechanisms such as socialisation and tenure may moderate the effect of TMT diversity on firm performance.
Drawing upon two competing perspectives of resource-based view (RBV) and transaction cost economics (TCE), this paper theorises and tests the potential positive and negative effects of TMT cultural diversity on firm performance with 442 publicly listed IT companies in the USA.
The results supported the RBV prediction that TMT cultural diversity enhances firm performance and socialisation strengthens the positive effects of a culturally diverse TMT on firm performance. However, tenure was not found to be important in promoting diversity gains or mitigating diversity costs. By showing clear support for the RBV prediction of the positive impact of TMT cultural diversity and refuting the TCE prediction of the potentially negative effects, this research strengthens the business case for embracing cultural diversity in TMTs.
This paper contributes to the current literature by developing a more balanced framework to deepen our knowledge of how TMT cultural diversity may impact firm performance, and how the use of socialisation and tenure may moderate the TMT cultural diversity–firm performance relationship from both cost and benefit perspectives.
