Board faultlines, financial reporting quality, and corporate innovation: evidence from China

Abstract This paper investigates how board faultlines influence corporate innovation in China, with a specific emphasis on the mediating role of financial reporting quality. We tackle the methodological limitations in measuring the interactions of multiple dimensions in board faultlines by employing the average silhouette width algorithm. We find a significantly positive association between board faultlines and corporate innovation, which is partially mediated by financial reporting quality. This study offers empirical support that expands the theoretical framework of Bushman and Smith (2001) and helps us better comprehend the pathways through which board faultlines might influence corporate innovation. These findings offer important implications for practice and policy. Firms should move beyond simple diversity targets and design boards that balance diversity with integration to strengthen governance and innovation. Regulators should promote frameworks that preserve diversity while enhancing board coordination. Our study calls for a shift in policy that promotes greater decentralisation of State-Owned Enterprises so that an adequate level of faultlines on the board could spur a firm’s capacity to innovate and compete in the global market.