The Association between Board Diversity, Earnings Management and Firm Performance in Kuwait: A Research Agenda

This paper aims to examine the consequences of board diversity. The objectives are to measure the impact of gender, age, national diversity on earnings management (EM). This research study raises the following questions: Does board diversity affect earnings management and firm performance? Has the 2013 Kuwait Corporate Governance Code impacted on board diversity on earnings management, beside firm performance? The research uses data from 103 non-financial Kuwaiti listed companies in the period from 2010 to 2017. The data is collected from the companies’ data from secondary sources such as their annual reports. The data analysis methods are correlation, multi-regression and robust regression. Earnings management was measured using the model modified by Jones (1995) and Kothari et al. (2005). Firm performance measured by ROA, ROE, Tobin’s Q and total shareholder return. The independent variables are gender diversity, age diversity, nationality diversity, board size, board independent and role duality. Control variables are firm size, industry type, total debt, total revenue, oil price, percentage change oil price, gold price, the percentage change of gold price and, ROA.


INTRODUCTION
This research aims to examine the consequences of board diversity. The objectives are to measure the impact of board diversity on earnings management (EM) and on firm performance (FP). This research study raises the following questions: Does board diversity affect earnings management? Does board diversity affect firm performance? Has the 2013 Kuwait Corporate Governance Code impacted on board diversity on earnings management and on firm performance?

LITERATURE REVIEW
The literature review consists of two sections. Section 2.1 explains the background and context of this research. Section 2.2 reviews previous similar research studies.

Corporate governance
There has been an increasing interest in corporate governance since the 1990s arising from the major collapses of giant corporations and the privatisation of the public sector in the United Kingdom and the increased importance of globalization (Dreher et al., 2008) and (Vickers & Yarrow, 1991). This interest has been in parallel with many significant developments in corporate governance practices worldwide in response to these corporate and financial crises and in particular, the 2007 global financial crisis. There are various concepts of corporate governance depending on the time of the definition, the country's legal system and the country's economic culture (Salacuse, 2002). Despite the different definitions of corporate governance, each share a common element which is that corporate governance is a set of mechanisms which arranges the relationship between the firm's management, its shareholders and other stakeholders. For example, according to the Cadbury Code of Corporate Governance (1999), corporate governance can be defined as "the system by which companies are directed and controlled". On the other hand, La Portal et al. (2000), introduced corporate governance as a set of mechanisms which the firm's external stakeholders could use to protect their interests and the rights of internal stakeholders such as the board of directors and shareholders. Furthermore, the Organisation for Economic Co-operation and Development (OECD, 2004, p. 11) defines corporate governance as follows: "Corporate governance involves a set of relationships between a company's management, its board, its shareholders and other stakeholders. Corporate governance provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interest of the company and its shareholders and should facilitate effective monitoring". However, despite the fact that these definitions can identify some essential elements of corporate governance, the general environment (Pfeffer, 1982). In this regard, as explained by Pfeffer and Salancik (1978), executives serve as the link between the firm and external factors through co-selecting the assets expected to survive. Therefore, they serve as an essential instrument in bringing basic components of ecological vulnerability into the firm. With regard to the board, the resource dependence theory addresses how the board facilitates access to valuable resources. As explained by Rondoy et al. (2006), the theory emphasizes a firm's ability to form links to secure access to critical resources including capital, customers, suppliers and cooperative partners. Consequently, given that it is likely to have different insights, a more diverse board is seen as having a greater ability to understand the customer group. According to Thomsen & Conyon (2012), board diversity with regard to nationality, education, education, experience and background means that the board of directors has a considerable range of different knowledge and skills. Accordingly, they have greater insights into markets, customers, employees and business opportunities. This is likely to lead to a better understanding of business conditions and, hence, better organizational performance (Hillman et al., 2000). For instance, given that women have more insights, a gender diversified board of directors is better able to understand the needs of the entire market. Therefore, women representatives on the board are better able to understand women's needs and the same is true for men representatives on the board (Hillman et al., 2007;Drees & Heugens, 2013). The same can be said of age diversity where having board members of different age brackets is essential if the firm is able to meet the needs of the market with regard to all age brackets. In addition, national diversity on the board of directors brings different insights with regard to the different nationalities. This is important in ensuring the company's ability to acquire different resources that are vital to its success .

Human capital theory
Human capital theory is based on the assumption that formal education is highly instrumental and necessary in improving a population's productive capacity (Gibbons & Waldman, 2004). In other words, the theory postulates that an educated population is a productive population and, hence, education increases the firm's productivity and efficiency through increasing the level of cognitive stock of economically productive human capability that is a product of innate abilities and investment in human beings. Based on Terjesen's et al. (2009) research, gender differences result in a board of directors that has unique human capital. Similarly, having boards with different nationalities brings in unique human capital (Burgess & Tharenou, 2002). Consequently, those, who make it to the top, tend to be consistently better educated and with better skills and, thus, bring in unique human capital. In turn, this results in better corporate performance (Adams & Ferreira, 2009). Similarly, Luckerath-Rovers, (2011) see age diversity as conferring the firm with differing levels of human capital and this is essential for organizational success.

Social capital theory
Social capital can be defined as all the resources, whether real or implicit, that a person or group accrues through possession of a longlasting network of institutionalized relationships of shared contact and respect (Sealy & Vinnicombe, 2007). Social capital entails advantages that individual or collective actors have owing to their location in the social network structure. Consequently, this theory advocates for diversity in the board of directors given that a diverse board of directors is able to bring in different types of social capital from its members (Niu & Chen, 2017). For instance, a gender diverse board is likely to have more social capital than a single gender board given that both genders differ a lot in terms of social capital. The same case applies to nationality of diverse boards (Adams & Ferreira, 2009). This is because the different nationalities have substantial differences that are likely to result in substantially diverse social capital (Luckerath-Rovers, 2011). In addition, age diversity on the board of directors brings with it a wealth of social capital. This is because different age groups have different insights needs and the inclusion of every age group on the board brings in t related to different social capitals. Therefore, a board, which has various diverse aspects, is likely to possess more social capital and, hence, it is likely to perform better than a board that has no diversity (Carter et al., 2010).

Why Kuwait?
The purpose of choosing Kuwait is that it has a different democratic policy. In democratic terms, Kuwait is the best of the Gulf Cooperation Council (GCC) Countries and in 2017, was ranked 119 globally. This was the last time that Kuwaiti democracy was tested (The Economist Intelligence Unit, 2017). The Kuwaiti Constitution, which was issued in 1962, was the first Constitution in all GCC countries (Cordesman, 2018). The Kuwaiti Constitution, which is the fundamental law of the State, is the foundation of the instructions that apply to the country and its citizens (National Assembly, 2015). Also, in 1963, Kuwait set up the first National Assembly in GCC countries and, thereafter, was followed by Bahrain in 2002 (Cordesman, 2018). Also, in 2009, Kuwait was the first GCC country to introduce Kuwaiti women into its Parliament (Odine, 2013) and (National Assembly, 2015). The Kuwait National Assembly, which is the country's legislative authority, consists of 50 members elected by the Kuwaiti people. One of the National Assembly's important tasks is the study of Ministerial decisions (Herb, 2002). When compared to other GCC countries, Kuwait has an open economy because all the country's investors want this market which contains comprehensive disclosure of all listed firms (Al-Shammari & Al-Sultan, 2010; Alotaibi, 2014). In addition, at the beginning of 2017, the Kuwaiti Government announced a vision of the new Kuwait in 2035 with the aim of changing Kuwait into a commercial, regional financial, and cultural centre attracting all investments (New Kuwait, n.d). Surprisingly, Kuwait was the first GCC country to establish a stock market in 1977. This was followed by the Kingdom of Saudi Arabia, Oman, Bahrain and the United Arabic Emirates in 1980, and lastly Qatar in 1990 (Cheikh et al., 2018). Conversely, Kuwait was the last GCC country to issue a Corporate Governance Code in March 2013 and began operating it in June of the same year (Capital Markets Authority, 2013). On the other hand, they did not find any female CEOs who used aggressive discretionary accruals on earnings management. Also, Gull et al. (2018) hypothesis is that the demographic diversity (e.g. behaviour, education background and experience) has the ability to monitor their activities and reduce the earnings management. However, the authors take into account that their hypothesis has been rejected and that demographic diversity has a positive relationship with earnings management (Gull at al., 2018).

Board diversity (dender, age & nationality) and earnings management
The author found no study in the literature review which systematically examined age diversity and earnings management. Age diversity is the existence of age groups in the top management positions such as CEO, the board of directors and line management (Lausten, 2002) and (Carter et al., 2003). The appointment of young and older people to these positions brings about valuable management perspectives to that blend experience and creativity on the board of directors (Li et al., 2014). While the young directors bring creativity to the monitoring process and make it less hectic and error-prone, the older directors blend their experiences to ensure the effectiveness and accuracy of the monitoring system (Wegge, et al., 2008).
Author found few studies in the literature relating to national diversity. Hart's (2014) findings show that diversity in the nationality of the board's members brings divergent views to the board on management factors. This is because of their different backgrounds and experiences. esearch paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstr significant relationship between foreign directors and the higher level of earnings management. This is because of their different accounting knowledge. Also, they believe that it is unnecessary to appoint non-Nordic directors on the board.
On the other hand, Enofe et al. (2017) found that there is a negative relationship in Nigerian firms between international diversity and earnings management. Also, their findings confirm that foreign directors have an important role in reducing earnings management (Enofe et al., 2017). In contrast, Rauf's et al. (2012) findings show that in Malaysian firms a foreign board does not affect earnings management, and they fail to find the evidence of that.

Board diversity (gender, age & nationality) and firm performance
Many authors, such as Rose (2007) (2017) and Adams and Ferreira (2009), examined the relationship between gender diversity and company performance. Gender diversity and performance is a significant concern in the labour market and various practices have been adopted as a strategy to improving a firm's effectiveness (Miller et al., 2009). Both men and women have varying degrees of intelligence and, therefore, by making informed decisions from well-considered diverse perspectives, gender diversity can improve a firm's performance (Damardi, 2010). In addition, Carter et al. (2003) and Gordini and Rancati (2017) found a positive relationship between the presence of women on the board and firm value as measured by Tobin's Q. In a national American survey, firms, which had both men and women, had higher sales, higher profit margins and, consequently, higher revenues (Adams & Ferreira, 2009). A firm's culture is mirrored by the link between gender diversity and performance (Julizaerma & Sori, 2012). A diverse workforce has a more significant breadth of views and, hence, it appears to be well placed to deal with any given circumstance (Carter et  Having different management is essential because women create more businessto-business links and, thereby, they make the firm perform better (Lückerath-Rovers, 2013). Women are good at mentoring employees and, thus, boosting their career growth and, consequently, job satisfaction. Ultimately, these improve the firm's performance (Wahid, 2018).
Gender diversity and, particularly, having more women can reduce a firm's performance as a result of demographic demerits, interpersonal conflicts and their related effects (Jurkus et al., 2011). Gender diversity provides room for more battles because of divergent views and stereotypical behaviour. Conflicts cause lack of cohesion among members of a group (Ferreira, 2015). When conflict exists within a team, the firm's operational functions become compromised and this results in poor performance (Low et al., 2015). Conflicts can slow down the decisionmaking process and, thus, have an adverse effect on the firm's performance (Dwyer et al., 2003). According to Dutta and Bose (2007), stereotypical views, especially in countries where men are perceived to be at the top in every setting, affect cooperation among the team. However, Croson and Gneezy's (2009) findings show that women are at greater risk than men because of their emotions, characteristics and overconfidence. Also, women display lower performance in both a bargaining setting and a purely competitive situation (Croson & Gneezy, 2009).
In their study of gender diversity, Carter et al. (2010) and Rose, (2007) reported that they did not find a significant relationship between gender diversity and firm performance. Besides, she asserts that, although women have a very high representation on American and United Kingdom firms' boards, they have an extremely low representation on Danish firms' boards (Rose, 2007). Alowaihan's (2004), findings show that Kuwaiti women are better educated than men, but they do not have as much experience as men in the workplace. In addition, his findings show no significant differences between men and women in family firms. This is because of several reasons such as being married and having children; this means that women have more responsibility than men (Alowaihan, 2004). i The relationship between age diversity and firm performance has suffered from an absence of detailed analysis. Moreover, because of sharing experiences and acquiring skills age diversity is an essential factor of a firm's performance. Also, young board members include female directors because, compared to older board directors, they are more able to think in a new creative way (Carter et al., 2003). According to Choi and Rainey (2010) there is a positive relationship in American firms between age diversity and performance. Also, Darmadi's (2011) findings show a similar positive result in that young directors increase a firm's financial performance. Pitts (2005) noted that in a firm with age diversity employees were likely to increase their confidence because they believed that they had an opportunity to grow their careers within its ranks. Interestingly, Dagsson  In addition, their findings show that in Dutch firms there is no relatonship between the directors' age group and firm performance (Diepen, 2015). Rahman's et al. (2015) findings show that age diversity can overcome the board's problems and encourage creative thinking. On the other hand, similarly aged board members reduce the firm's performance. However, if there is some age diversity within the board, it can improve the firm's performance (Rahman et al., 2015). In addition, in Australia, the findings show that in Australian firms age diversity has no significant effect on employee productivity (Ali & Kulik, 2014). There are various conclusions about the effect of age diversity on a firm's performance (Carter et al., 2003).
Also, there is a lack of information in the literature about national diversity and firm performance. Nationality diversity affects, also, both in a positive and negative manner, a firm's economic performance. By using the available literature, many authors, such as Alesina and La Ferrara (2005), Hart (2004), Kaczmarek (2009) and Diepen (2015), examined the relationship between national diversity and firm performance. Their main focus was to determine the pros and cons of national diversity and firm performance by considering the employees' perceptions of employees and by not investigating only one country. These research studies show a positive relationship between national esearch paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstr diversity and firm performance. Further, Harjoto et al. (2015) conclusions show that boards of management with international diversity are more likely to perform better because of their different knowledge, perspectives and the board's experiences in problem-solving. Similarly, Delis's et al. (2016) findings show that an internationally diverse board of directors is more likely to have a positive influence on the firm's performance. This is because employees seek to work diligently within the parameters of international standards. Also, Hart (2004) and Diepen's (2015) findings show that immigrant entrepreneurs have a negative effect on the firm's performance organization and, more particularly, when only international board directors occupy the top management positions. Such a firm creates an environment whereby the employees have little or no confidence about working in the firm because all the top managers are of the same nationality. Also, Kaczmarek (2009) conducted similar research about nationality diversity and firm performance. His findings show that, when the firm's directors work with international diversity in the subordinate staff, they tend to have faith in the firm's policies organization and, thus, this leads to the firm performing better. Besides, in his study, Darmadi (2011) argues that international diversity has no influence in in both a firm's marketing performance measured by Tobin's Q and accounting measured by ROA performance. This means that national diversity has nothing to do with firm performance.

Description of gaps in the research literature
There were several studies have not been addressed in the literature. Reviewing the previous literature, it can be considered that there is a lack Kuwait's 2013 CG code. In addition, there had been a lack of significant research into board diversity and earnings management, gender diversity on board including CEO, and nationality diversity and firm performance in GCC countries and, more particularly, in Kuwait. Besides, there is no research found on age diversity and earnings management. Also, more generally in the literature, there were few references to board diversity and earnings management. Also, there is no GCC and more particularly in Kuwait use oil price and percentage change in oil price as a control variable. More specifically, there is no Kuwaiti research with a large sample and time period that measures and there are no Kuwaiti research studies that used the model modified by Jones (1995) and Kothari et al. (2005) to measure earnings management, beside total shareholder return to measure firm performance.

Importance and contribution of the proposed research
This study is the first Kuwaiti study and represents a significant contribution to Kuwaiti literature and empirical studies. In particular, this study evaluates whether or not the 2013 Kuwait CG code has been successful in promoting effective board diversity. Also, no previous study esearch paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstr has tested board diversity and earnings management in GCC countries and, more particularly, in Kuwait. Moreover, the only research in the literature that test age diversity and EM. Besides, this is the only study that has applied both the modified Jones and Kothari model to GCC countries and, more particularly, to Kuwait. In addition, the literature shows that few studies have investigated the relationship between board diversity and performance in GCC countries and, more particularly, in Kuwait. Furthermore, this is the only Kuwaiti study that has tested gender diversity on board members including the CEO. It is the only study that has measured performance by total shareholder return in GCC countries and, more particularly, in Kuwait. This study uses the largest sample of Kuwait non-financial listed companies and the most up to date data. Also, it is the only research that used oil price and the percentage change of oil price as a control variable in Kuwait. In addition, it is the only research that used gold price and the percentage change of oil price as a control variable in literature. This study will be important for companies to be aware of how gender, age and national diversity may affect the earnings management in Kuwait.

Research design
All the data is collected from secondary sources such as Capital IQ, Boursa Kuwait and Bloomberg databases and the companies' annual reports. The proposed analysis method is quantitative analysis "Regression type". The reason for proposing a quantitative analysis method and mainly regression analysis is that almost all previous empirical studies about board diversity and earnings management and performance have used quantitative methods. Therefore, this study is consistent with them.

Data description
The data will be from 103 listed Kuwaiti non-financial companies. The exclusion of the country's 67 financial enterprises from the sample is mainly due to the complex structure of financial institutions and the way, on the one hand, that they are governed and operate and, on the other hand, because their corporate governance structure and practices are different to those in non-financial companies. Furthermore, most previous studies such as Peni and Vahamma (2010), and Gull et al. (2018), which have examined the impact of board diversity and earnings management in addition to performance, have excluded financial companies. Therefore, it is essential to apply the same process for consistent analysis.
The data, which relates to the board of directors, earnings management and firm performance, is collected manually from Boursa Kuwait, capital IQ and the Bloomberg database. The period of study is esearch paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstr from 2010 to 2017 inclusive. The reason for choosing this period is, firstly, because it provides data from the latest available period. Secondly, this period follows the major development of various corporate governance practices in 2010 and, therefore, the data related to the latest practices of corporate governance. Thirdly, this period is before and after the introduction of the Kuwaiti Corporate Governance Code in June 2013.
The data, related to the board structure, is data relevant to board size, gender diversity on the board, age diversity, nationality diversity, board independence, company age, company size, total number of departments, total revenue, industry type, rule duality & CEO diversity. The data, related to firm performance, includes both accounting based performances and market-based performance. Earnings management is measured by the model modified by Jones (1995) and Kothari (2005). The variables, used to represent or measure these data, are as follows: The board size is measured simply by the total number of board members (both executive and non-executive directors).

-Board independence
The board independence is measured by the percentage of independent non-executive directors out of the total number of directors (i.e. the ratio of independent directors to total board size).

-Gender diversity
The gender diversity is measured simply by the percentage of women on the board out of the total number of directors, beside the CEO (i.e. the ratio of women directors to total board size).
-Age diversity The director age to the average age of the directors of each board is first determined (i.e. the ratio of director age to average age the directors on board).

-Nationality diversity
The nationality diversity is measured simply by the percentage of non-Kuwaiti director on the board out of the total number of Kuwaiti directors (i.e. the ratio of non-Kuwaiti directors to total Kuwaiti directors on board).
-Other data "Control variables" In addition to the main two types of data (i.e. board diversity and earnings management, board diversity and firm performance) additional data are used to identify whether or not the noncorporate governance variable has an impact on EM & FP. These data are company size, company age, total revenue, total debt, leverage, oil price, the percentage change in oil price, gold price and percentage change of gold price, and industry type. This research uses correlation analysis to examine a linear relationship between two variables and multi-regression analysis to examine the dependent variable with many independent variables.
Earnings management: the following two models are used to test the impact of board diversity and earnings management. The first one is the modified Jones model (1995).
esearch paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstr Where is total accruals of company i, AT is total assets in the beginning of the year, ∆ is revenues in year t minus revenues in year t-1, ∆AR is net receivables in year t less net receivables in year t-1 and is the gross property, plant and equipment in year t. a1, a2 a3 are obtained by estimating the equation using each firm in industry.
The second one is the modified Kothari model (2005): Where is total accruals of company i, AT is total assets in the beginning of the year, ∆ is revenues in year t minus revenues in year t-1, ∆AR is net receivables in year t less net receivables in year t-1 and is the gross property, plant and equipment in year t. a1, a2 a3 are obtained by estimating the equation using each firm in industry. In addition of a4; ROA is the Return on Asset.
Firm performance: two types of financial performance, namely, accounting-based measures and market-based measures are used to test the impact of board diversity and their effectiveness on short-term and long-term performance. For the accounting-based measures, we use ROA and ROE and, for the market-based measure we use Tobin's Q calculated by dividing market value of the firm by replacement value of the company's assets. The reason for using Tobin's Q is that it includes a long-term element in its calculation and because most it most the corporate governance and performance studies have used this measure. In addition, total shareholder return (TSR) represents a percentage of the company's performance over a particular period of time as reflected in the values of its various stocks and shares. TSR measured by the use of the dividend adjusted share price of 1ast of January and 31 of December of the same year and takes the percentage change.

Methods and choice of analysis
The proposed quantitative analysis methods use correlation, multiregression and robust analysis. The author used the following models to examine the influence of independent and control variables on EM, beside firm performance: where: is the Constant; GD is Gender diversity; AD is Age Diversity; ND is Nationality diversity; BSZ is board size; BID is board independence; esearch paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstr DUAL is role duality; CSZ is company size; CA is company age; CID is company industry; TD is Total Debt; TR is total revenue; L is leverage; and ε is the error term The following table summarizes the main variables, which we used, and their definitions.

Expected outcomes
After having regard to the literature review, the author obtains the primary results: esearch paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstr

CONCLUSION
The main limitations of the methods which to be applied can be summarized as follow: Quantitative methods indicate whether there is a relationship between the variables. However, it does not provide an explanation for such a relationshi p. Also, the data was so hard to obtain it. Besides, no similar research in Kuwait or GCC countries. Finally, the study will be limited to Kuwait and may not be applicable to other regions. This study will be important for companies to be aware of how gender, age and national diversity may affect the earnings management and firm performance in Kuwait.