When Bigger Is Not Better: How Firm Size Shapes the Board Diversity–Profitability Nexus

ABSTRACT This paper empirically investigates how board characteristics—gender diversity, ethnic diversity, foreign participation, and board independence—affect firm performance (ROA, ROE, and Tobin's Q) among the top 100 FTSE Bursa Malaysia non‐financial firms. Further, we examine the moderating role of firm size on the relationships between board characteristics and firm performance. The dataset comprises 800 firm‐year observations for 2015–2022. Our study uses interactive variables to assess the effect of gender diversity, ethnic diversity, and foreign participation on firm performance. The findings reveal that firm size alters the impact of board characteristics on firm performance. Specifically, gender diversity's influence shifts from negative to positive with larger firms, while ethnic diversity and board independence exhibit the opposite trend when measured by Tobin's Q. Additionally, firm size weakens the positive effect of foreign participation on ROE, rendering it insignificant. The study also finds that ethnic diversity within gender‐diverse boards negatively but significantly impacts firm performance. This study challenges the uniform assumptions about board diversity's impact on firm performance, demonstrating context‐dependent variations. It extends corporate governance literature by revealing firm size as a critical moderator in board‐performance relationships and highlights inconsistencies in board diversity effects within an emerging economy context. The findings suggest policymakers and corporate leaders should tailor board diversity strategies based on firm size to maximize performance benefits. Larger firms may leverage gender‐diverse boards for positive outcomes, while ethnic diversity and board independence require careful management to avoid unintended negative effects. Regulators should consider firm size when designing corporate governance policies to enhance firm performance in emerging markets.