Gender diversity on the board of directors
Name: Lisa Dral
Student Number: 10632115
Programme: Economie en Bedrijfskunde Track: Financiering en Organisatie Name supervisor: A. R. S. Woerner
Date: 02/02/2016
Abstract
This study examines the relationship between gender diversity in the board of directors and firm performance. Gender diversity is measured by the percentage of female directors in the boardroom and firm performance is measured by two performance measures, Scale Decisions and Operating Expenses. The empirical analysis, based on a sample that consists of S&P 500 firms, show either no significant effect or a significantly negative effect between gender diversity in the board of directors and firm performance.
Statement of Originality
This document is written by Student Lisa Dral who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
1 Introduction
Previous literature shows that women hold few board of director seats. In 2013, women held 16.9% of the board seats in the Fortune 500 companies (Catalyst, 2014). 4.8% of the CEO positions in Fortune 500 companies were held by women in 2014 (Catalyst, 2014). In my sample, 18.5% of the board directors are women. The proportion of female directors on the board is changing, because companies are under public pressure and governments are considering to implement gender quotas. Norway, for example, introduced a law in 2003 that required Norwegian firms to have at least 40% female directors on the board. Some governments think that a gender quota improves firm performance and other governments only consider a quota because of outside pressures. An important discussion is how gender diversity in the board of directors really affects firm performance.
This paper investigates this question. Previous studies do not show unambiguous results of the effect of the presence of women in the boardroom. For example, Shrader et al. (1997) find no significantly positive relationship and in some cases they even find a significantly negative relationship. Ahern and Dittmar (2012) find a negative effect of the gender quota implemented in Norway on firm performance. On the contrary, the paper of Carter et al. (2003) provides evidence of a positive relationship between gender diversity in the boardroom and firm performance.
Many of the articles that studied this effect used Tobin’s Q as a measure of firm performance. However, Dybvig and Warachka (2012) argue that Tobin’s Q is confounded by endogeneity. Therefore, they introduce two alternative performance measures that unambiguously capture firm performance, namely Scale Decisions and Operating Expenses. I contribute to the literature by using these alternative performance measures as a measure of firm performance to examine the relationship between gender diversity on the board of directors and firm performance. I also check whether the alternative performance measures give more precise approximations of this relationship. Gender diversity will be measured as the percentage of female directors on the board.
Overall, I find that when using Scale Decisions as dependent variable, gender diversity in the boardroom has an influence on firm performance. A significantly negative relationship between gender diversity on the board of directors and firm performance was found. This result holds after controlling for size, leverage and industry.
This paper is structured as follows. Section 2 presents a theoretical framework of prior empirical evidence, that leads to the hypothesis. In section 3, I discuss the data and the variables
that are used. The methodology is presented in section 4. In section 5, the relationship between gender diversity in the boardroom and performance is analyzed, while section 6 concludes.
2 Theoretical framework
There is a lot of literature about characteristics of men and women in the business field, about gender diversity and about the effect gender diversity has on firm value. Medland (2004) argues that a reason for the absence of women on boards is their lack of connections. He says that the informal social network linking directors is the most important obstacle to female directorships, because this social network consists primarily of men. Another reason for the absence of female directors on the board can be explained by the view of Earley and Mosakowski (2000). They argue that members of homogeneous groups are more likely to share the same opinions, which leads to them communicating more frequently. Gneezy et al. (2003) test whether men and women show differences in their ability to perform in competitive environments. They find that in a competitive setting, the average performance of men increases, while the average performance of women remains the same. This means men outperform women on average in competitive environments. Campbell (1996) however states that women can be an inspiration to the company’s diverse workforce. He also says that a woman can bring some perspective to the board that a company hasn’t had before.
To discover if gender diversity has an effect on the performance of a company, a lot of research has been done. However, the evidence of these studies is ambiguous. Rose (2007) uses a sample of Danish firms listed on the Copenhagen Stock Exchange during the period of 1998-2001 to study the influence of female board representation on firm performance. He hypothesizes a positive impact of a higher degree of females on boards of directors on firm performance. He mentions several arguments for this hypothesis. For example, a higher level of gender diversity in the board may serve as a positive signal to possible job applications, by which the board can attract well qualified persons outside the circle they normally recruit from. Another reason is that gender diversity in the boardroom may also give a sign to women so that they know they are not excluded from the highest positions in the firms and that these positions depend only on each person’s skills and qualifications, thereby increasing competition. However, with the use of Tobin’s Q as dependent variable, no significant link was found. Therefore, Rose (2007) concludes that gender diversity in the boardroom does not influence firm performance.
In their paper, Shrader et al. (1997) also find no significant positive relationship, but they did find significantly negative relationships. They studied relationships among several
measures of women in management and firm financial performance (e.g. ROS and ROA). Their data consisted of reports made by the 200 firms with the largest market value of the US. The results indicate that there was no significantly positive relationship and that in some cases, significantly negative relationships were found.
The results of Ahern and Dittmar (2012) suggest a negative effect of the presence of women on board on firm performance as well. They test the implementation of the law that required 40% of Norwegian firms’ directors to be women with a panel of 248 publicly listed Norwegian firms from 2001 to 2009. As a measure of firm performance they used Tobin’s Q. The 40% gender quota had a large negative effect on Tobin’s Q and caused a significant drop in the stock price at the announcement of the law. This is consistent with the view that firms choose boards to maximize value. Imposing the constraint of a gender quota, the suboptimal choice of directors leads to a decline in firm value.
Adams and Ferreira (2009) also conclude that firms perform worse when gender diversity is greater. In their paper they investigate the hypothesis that gender diversity in the boardroom affects governance in meaningful ways. They examine this by looking at attendance, committee assignments, turnover and compensation. Based on a sample of a panel of director-level data for S&P 500, S&P MidCaps and S&P SmallCap firms, they find that gender diversity has significant effects on board inputs. Women appear to have less attendance problems than men and the attendance behavior of male directors is better when the fraction of women on the board is greater. Female directors are also more likely to sit on monitoring-related committees than male directors. This suggests that gender-diverse boards assign more effort to monitoring. In firms with relatively more female members on boards, Adams and Ferreira (2009) also find evidence that CEO turnover is more sensitive to stock return performance and that directors receive more equity-based compensation in these firms. However, their results suggest that, on average, firms perform worse when gender diversity of the board is greater. To investigate if gender diversity only increases value when additional board monitoring would enhance firm value, they conduct another experiment. The conclusion of that experiment is that gender diversity is valuable for firms with weak governance, because this leads to a tougher board and a tough board is beneficial for firms with weak governance since such firms do not run the risk of excessive monitoring. This also means that gender diversity can negatively impact firm value for well-governed firms.
A study conducted by Smith et al. (2006) finds evidence of a positive effect of a gender diverse top management on firm performance, provided that there are sufficient qualified women. They investigated the relationship between gender diversity in the boardroom and firm
performance. They use a large sample of the 2500 largest Danish firms during 1993 to 2001. Four different firm performance measures are used, based on gross profit, contribution margin, operating income and net income after tax. The effect on firm performance of a higher fraction of female directors in their sample varies from none to positive. Overall, their results support, to some extent, the view that a more gender diverse top management would improve financial performance of Danish firms. Nonetheless, since the results also indicate that qualifications are important, it is crucial that there are sufficient qualified women who can fill the positions as female directors.
Catalyst (2004), an organization working to increase opportunities for women at work, also find a positive relationship between gender diversity and financial performance. In their paper, 353 Fortune 500 companies were investigated to explore whether there is a connection between gender diversity and financial performance. They use two measures to examine financial performance: Return on Equity and Total Return to Shareholders. Even though Catalyst is an organization that wants progress for women, which means their findings could be subjective, they conducted this research based on information of which the accuracy has been ensured by a rigorous verification process. Their results show that the companies with the highest representation of women on their top management teams had better financial performance than the companies with the lowest presentation of women. This holds for both financial measures. These findings suggest that there is a positive connection between gender diversity and financial performance.
Furthermore, Campbell and Minguez-Vera (2008) find a positive effect between gender diversity in the boardroom and firm value too. They examine the impact of the presence of women on the board of directors on firm value. Their sample for the panel data analysis consists of non-financial firms that were, during the period from January 1995 to December 2000, listed on the continuous market in Madrid. As a measure of firm value Tobin’s Q is used and four alternative variables are used for the percentage of women. They observe that a dummy for the presence of a woman does not have a significant impact on firm value, which in other words means that a woman’s presence, per se, does not affect firm value. The coefficient of the percentage of women on the board, however, has a significantly positive effect. Their main finding is thus that the percentage of women on the board positively influences firm value.
Finally, Carter et al. (2003) examine the relationship between board diversity and firm value for Fortune 1000 firms and observe a positive effect as well. Board diversity in this paper is defined as the percentage of women, African Americans, Asians and Hispanics on the board of directors. When comparing two groups, firms with two or more women or minorities on the
board and firms with no women or minorities on the board, they find significant differences in value between the groups as measured by Tobin’s Q. The high representation firms outperformed the low representation firms. Their regression results suggest that after controlling for size, industry and other corporate governance measures, there is a significantly positive relationship between the presence of women or minorities on the board and firm value, as measured by Tobin’s Q. Overall, their results provide evidence of a positive relation between diversity on the board of directors and firm value.
Many of these articles use Tobin’s Q, which is the ratio calculated as the market value of a firm divided by the asset value of the firm, as a measure of firm value. A high Tobin’s Q means a high firm value. However, Dybvig and Warachka (2012) argue that this is not a good approximation. According to them, there exist endogeneity problems in the relationship between Tobin’s Q and firm performance. They explain this with the following example. The ideal manager maximizes their firm’s market value net of invested capital. When managers don’t do this, underinvestment results in a proportional decrease in capital that lowers the denominator of Tobin’s Q. Nevertheless, since the combination of decreasing marginal revenue and increasing marginal costs reduces the marginal profit of additional output, underinvestment causes a less than proportional decrease in the gross margins that determine the numerator of Tobin’s Q. The smaller decrease in the numerator of Tobin’s Q relative to its denominator causes Tobin’s Q to increase due to underinvestment. Better operating efficiency in terms of scale decreases Tobin’s Q while better operating efficiency in terms of cost discipline increases Tobin’s Q. The net impact better operating efficiency has on Tobin’s Q is ambiguous, since this sign depends on the relative importance of scale decisions versus cost discipline. In short, Dybvig and Warachka (2012) thus say that operating efficiency decreases costs while it increases output and this causes Tobin’s Q to increase and decrease, respectively. Hence, better operating efficiency has a polysemic influence on Tobin’s Q.
To avoid this problem, Dybvig and and Warachka (2012) introduce two alternative performance measures that capture the implications of scale decisions and cost discipline separately. Scale decisions are evaluated using gross margins, which are equal to revenue minus cost of goods sold. This operating efficiency measure is calculated as gross margin divided by capital. Cost discipline is evaluated using operating expenses, so this operating efficiency measure is calculated as operating expenses divided by capital. Low operating efficiency measures mean that managers choose an output level that matches marginal revenue with the marginal cost of production and that they choose to maintain low operating expenses. Hence,
as operating efficiency improves, both alternative performance measures decrease unambiguously.
Since no study has made use of these alternative performance measures, this paper will investigate the relationship between board diversity and firm value using the two alternative performance measures as a measure of firm performance and check whether the two altenrative performance measures give more precise approximations of this relationship. Out of all previous research, no unambiguous conclusion can be drawn. Ahern and Dittmar (2012) investigated the effect of the implemented gender quota in Norway and this paper is published in a highly rated journal. Although they make use of Tobin’s Q, which is a biased measure of firm performance according to Dybvig and Warachka (2012), they also find a significant drop in the stock price at the announcement of the law. Since they find these effects based on a gender quota that was actually adopted, their paper is more reliable than other papers. Therefore, I expect the relationship to be the same. This leads to the following hypothesis:
-‐ Gender diversity has a negative impact on firm performance.
According to Dybvig and Warachka (2012), an improvement of operating efficiency would
lead to a decrease in both of the alternative performance measures. If gender diversity will negatively influence firm performance, this will mean that operating efficiency decreases. Then I expect that both the alternative performance measures will increase. This means that high numbers of the alternative performance measures imply a low firm performance and low numbers of the alternative performance measures imply a high firm performance. With a negative relationship between gender diversity and firm performance, I thus predict a positive coefficient of gender diversity.
3 Data and variables
To investigate the relationship between gender diversity of the board of directors and firm performance, I focus the analysis on S&P 500 firms. For these firms, financial data were obtained from the COMPUSTAT database. In addition, data on board of director characteristics are gathered from Institutional Shareholder Services (formerly RiskMetrics). In this dataset, the director data includes a range of variables related to individual directors. The data collection began in 1996 and is updated annually. Since 2014 is the most recent year which is fully updated, this paper will examine the influence of gender diversity of the board on firm performance for that year. There are 498 firms with a complete set of financial data, but because
of missing board of director data the sample is reduced to 465 firms with a complete set of all the data items.
The dependent variable is firm performance. As a measure of firm performance, both of the alternative performance measures introduced by Dybvig and Warachka (2012) are used. One alternative performance measure will be called Scale Decisions since this performance measure focuses on scale decisions. It is calculated as gross margin divided by capital. Gross margin is equal to revenue minus cost of goods sold. The other alternative performance measure will be called Operating Expenses, because this performance measure focuses on operating expenses. It is calculated as operating expenses divided by capital. To see if there are any differences between the use of the alternative performance measures and the use of Tobin’s Q as dependent variable, Tobin’s Q will also be used as firm performance. Tobin’s Q is calculated as the market value of a firm divided by the asset value of a firm. At a low Q, between 0 and 1, it costs more to replace a firm’s assets than the firm is worth. A Tobin’s Q higher than 1 means that the firm’s worth is higher than the cost of its assets. Thus, when Tobin’s Q is high, this indicates a high firm performance.
The independent variable is gender diversity of the board of directors. As a proxy for this variable, the percentage of female directors on the board is used. The variable is called Percentage Women and is calculated as the number of women on the board divided by the total number of directors on the board.
A number of control variables are also included. The first control variable is called Board Size, which is the total number of directors. Leverage is the second control variable and this is equal to the ratio of long-term debt to total assets. The next control variable is Firm Size, which is equal to the natural logarithm of total assets. At last, it is controlled for industry using one-digit SIC dummies.
Table 1 Descriptive statistics
Mean Standard Deviation Minimum Maximum
Scale Decisions 0.485 0.587 -6.634 7.181 Operating Expenses 1.185 1.884 -2.862 29.904 Women 2.022 1.048 0 7 Percentage Women 18.5 8.668 0 46.667 Board Size 10.787 2.016 5 20 Firm Size 9.867 1.28 7.407 14.761 Leverage 0.237 0.159 0 1.35 Number of observations = 465
Table 1 reports descriptive statistics for the sample firms. The first performance measure, Scale Decisions, has a mean value of 0,485. The second performance measure, Operating Expenses, has a mean value of 1,185. On average, 18,5 % of the board of directors in the sample are female directors. In the sample, this means that the average number of women on the board is 2,022. The average board is made up of 10,79 directors. Firm size, which is equal to the natural logarithm of total assets, is 9,87 on average. The mean of leverage is 0,237.
Table 2
Breakdown of women by industry
Notes: description of the divisions of the ranges of SIC Codes. 0100-0999: Agriculture, Forestry and Fishing;
1000-1499: Mining; 1500-1799: Construction; 2000-3999: Manufacturing; 4000-4999: Transportation,
Communcations, Electric, Gas and Sanitary service; 5000-5199: Wholesale trade; 5200-5999: Retail trade; 6000-6799: Finance, Insurance and Real Estate; 7000-8999: Services; 9900-9999: Nonclassifiable.
In table 2 a breakdown of the number and percentages of women in each industry is provided, inspired by Carter et al. (2003). This table illustrates the differences in the presence of women in each industry. As can be seen, in this sample most of the firms have two female directors on the board. This is equal to 41.5% of the firms. Only 4.3% of the firms have no women on their boards of directors at all. 18.7% of the firms have three female directors on their boards and around 8% of the firms have four, five or seven women on their boards, with
Number of female directors on board
0 1 2 3 4 5 7
SIC Code
Firms % Firms % Firms % Firms % Firms % Firms % Firms % Total
0100-0999 0 0.0 0 0.0 0 0.0 1 0.0 0 0.0 0 0.0 0 0.0 1 1000-1499 4 15.38 8 30.77 12 46.15 1 3.85 1 3.85 0 0.0 0 0.0 26 1500-1799 0 0.0 4 66.67 2 33.33 0 0.0 0 0.0 0 0.0 0 0.0 6 2000-3999 9 4.74 51 26.84 78 41.05 34 17.89 13 6.84 4 2.11 1 0.53 190 4000-4999 3 4.48 16 23.88 24 35.82 17 25.37 7 10.45 0 0.0 0 0.0 67 5000-5199 0 0.0 1 10.0 5 50.0 4 40.0 0 0.0 0 0.0 0 0.0 10 5200-5999 0 0.0 9 23.68 19 50.0 6 15.79 3 7.89 1 2.63 0 0.0 38 6000-6799 2 2.82 14 19.72 35 49.3 14 19.72 4 5.63 2 2.82 0 0.0 71 7000-8999 2 3.64 23 41.82 18 32.73 10 18.18 2 3.64 0 0.0 0 0.0 55 9900-9999 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 1 100 0 0.0 1 Total 20 4.3 126 27.1 193 41.51 87 18.71 30 6.45 8 1.72 1 0.22 465
only one firm having seven female directors. The biggest industry is the manufacturing industry. Of the firms in this industry, four have five women on their boards and one has seven women on their board (this is also the only firm that has seven female directors on the board). Firms in mining have the highest percentage of firms with no female directors on their boards and this percentage is equal to 15.4%. Furthermore, two industries (Agriculture, Forestry and Fishing and Construction) have no firms with more than three female directors on their board.
4 Methodology
To test the relationship between gender diversity in the board of directors and firm performance, I regress the alternative performance measures that focus on scale decisions and operating expenses against a measure of gender diversity in the board and several control variables using least square estimations. To check for differences between the alternative performance measures and Tobin’s Q, the same regression will be done using Tobin’s Q as dependent variable. This leads to the following model:
𝐹𝑖𝑟𝑚 𝑃𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒 = 𝛽/+ 𝛽1∗ 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑊𝑜𝑚𝑒𝑛 + 𝛽𝑥 + 𝜀
where Firm Performance can be either Scale Decisions, Operating Expenses or Tobin’s Q and x is a vector of the control variables (Board Size, Firm Size, Leverage and Industry).
Yermack (1996) finds a negative relationship between board size and Tobin’s Q. Since the alternative performance measures have an opposite meaning (high operating efficiency means a low firm performance measure), I expect a positive coefficient of Board Size. Firm size is a typical determinant of firm performance according to Isidro and Sobral (2014). They say firm size also leads to higher costs of monitoring, because larger firms are more complex. In line with the paper of Campbell and Minguez-Vera (2008), I expect a negative relationship between firm size and firm performance and this means a positive coefficient of Firm Size. I expect the sign of the coefficient of Leverage to be positive as having a lot of debt is an efficient way to reduce the agency conflict in a firm. According to Jensen (1986), debt serves to reduce the amount of money under managers’ control. This decreases free cash flow and reduces the likelihood of unprofitable investments. For the control variable Industry, dummy variables are created for each industry (minus one) according to the SIC code of the firm.
The null hypothesis that gender diversity of the board of directors does not have an impact on firm performance is tested. If the null hypothesis is rejected, a positive sign of β1 means a negative effect on firm performance and a negative sign of β1 means a positive effect
on firm performance. If the null hypothesis is not rejected, it means there is not enough evidence to indicate that gender diversity of the board of directors has an impact on firm performance. It should be mentioned that either significantly negative results or insignificant results of β1 do not mean that female directors are worse directors. According to Farrell and Hersch (2004), these results may imply that firms choose female directors because of outside pressures instead of choosing female directors to maximize value.
5 Results
The regression results are documented in table 3. In this table, the relationship between the percentage of women on the board of directors and firm performance is shown. In the first column, the alternative performance measure that focuses on scale decisions is used as dependent variable. In the second column, the regression is done with the alternative performance measure that focuses on operating expenses as dependent variable. Tobin’s Q is used as firm performance in the last column.
In the first column it can be seen that the percentage of women on the board of directors is significant and positively related to the performance measure that makes use of gross margin at the 5% level. This means that the effect of gender diversity in the board of directors on the first alternative performance measure is negative. This result is similar to that of Ahern and Dittmar (2012) and in line with the hypothesis of this paper. In the second column, the coefficient of the percentage of women on the board is also positive, but not significant. This means that gender diversity in the board of directors does not have a significant effect on the performance measure that focuses on operating expenses. Shrader et al. (1997) found comparable outcomes in their paper, namely no presence of a significantly positive relationship and in some cases significantly negative relationships. In the last column, the effect of the percentage of women on Tobin’s Q is negative, but insignificant. This outcome is similar to the outcome when Operating Expenses is used as dependent variable. All coefficients for the percentage of women thus imply a negative effect on firm performance, but only the effect of the percentage of women on the firm performance Scale Decisions is significant. This might suggest that boards with more female directors are more hesitant to invest which leads to underinvestment and thus bad scale decisions.
Table 3
OLS regression on the percentage of female directors on the board and firm performance Scale Decisions Operating Expenses Tobin’s Q
Constant 1,0502 (4.02)*** 1,1498 (1.98)** 7.88 (10.11)*** Percentage Women 0.0095 (2.36)** 0.0101 (1.39) -0.0023 (-0.32) Board Size 0.0153 (1.17) 0.0174 (0.50) -0.0282 (-0.98) Firm Size -0.0859 (-3.21)*** -0.026 (-0.34) -0.5283 (-7.29)*** Leverage -0.1137 (-0.40) -0.6259 (-1.37) -1.9629 (-4.26)*** Industry Dummies Agriculture, Forestry and
Fishing 0.0259 (0.48) -0.4202 (-4.17)*** 1.0231 (8.54)***
Mining -0.2179 (-4.61)*** -0.7208 (-7.06)*** -0.9429 (-6.34)*** Construction -0.2425 (-4.91)*** 0.7066 1.23 -1.5507 (-8.22)*** Transportation,
Communcations, Electric, Gas and
Sanitary service -0.2056 (-4.96)*** -0.3329 (-1.73)* -0.5201 (-4.02)*** Wholesale trade 0.228 (2.46)** 5.2294 (1.96)** -0.4443 (-1.19) Retail trade 0.4098 (5.68)*** 1.6429 (6.69)*** 0.0587 (-0.23) Finance, Insurance and
Real Estate -0.2253 (-3.84)*** -0.6412 (-4.15)*** -0.6461 (-4.31)*** Services 0.0754 (0.43) -0.0069 (-0.03) -0.0038 (-0.02) Nonclassifiable -0.206 (-1.70)* -0.867 (-3.31)*** 0.8724 (3.23)*** Number of observations 465 465 465 R2 0.1777 0.2771 0.3499
Notes: *, **, *** denote significance at the 10%, 5% and 1% level, respectively. T-values are
reported in parenthesis, behind the parameter estimates. Robust standard errors are used. With regard to the control variables, I find that Board Size and Leverage do not have a significant effect on firm performance in the regressions with the alternative performance measures as dependent variable. The coefficient of Board Size does not have an effect on Tobin’s Q either. However, in the last column it can be seen that Leverage has a significantly negative effect on firm performance as measured by Tobin’s Q. This result seems counterintuitive, because Leverage is only significant when Tobin’s Q is used. The coefficients
of Firm Size are negative in the first two columns and significant only in the regression on Scale Decisions. In the first regression, firm size thus has a positive impact on firm performance. Nevertheless, in the third column Firm Size is negative and significant at the 1% level, implying a negative effect on Tobin’s Q. This result also seems counterintuitive and further research is needed to examine the true effect of these control variables. In their paper, Campbell and Minguez-Vera (2007) also report that firm size has a negative influence on firm performance as measured by Tobin’s Q. According to Isidro and Sobral (2014), a negative relationship means that the plus side of firm size outweighs the high monitoring costs of a larger firm.
Concerning the industry dummies, I observe that they have an effect on firm performance. However, the effect of most industries is ambiguous. The coefficients of Fishing using Operating Expenses and Tobin’s Q as dependent variables both show a positive effect on firm performance that is significant at the 1% level. The coefficient of Fishing using Scale Decisions as dependent variable is positive, implying a negative effect on firm performance, but this effect is not significant. The coefficients of Wholesale trade indicate negative effects on firm performance in all three regressions, but the effects are significant only when using the two alternative performance measures. Nonclassifiable is the only industry that shows unambiguous results, namely a positive and significant influence on firm performance. The rest of the industries show counterintuitive outcomes. For example, the coefficients of the Finance, Insurance and Real Estate industry imply a significantly positive effect on firm performance when using the two alternative performance measures as dependent variable, but a significantly negative effect on firm performance when using Tobin’s Q as dependent variable. Further research is necessary to investigate the unambiguous effects of the industry dummies.
With respect to the alternative performance measures, some of the outcomes are comparable. The signs of the coefficients in both regressions are mostly the same and when they are not, one of the coefficients is not significant. This may indicate that the alternative performance measures introduced by Dybvig and Warachka (2012) are valuable approximations of firm performance. However, when comparing the alternative performance measures to Tobin’s Q, I see many differences in the control variables as discussed before. Therefore, further research is required to say something about the differences between the alternative performance measures and Tobin’s Q and about the accuracy of the alternative performance measures.
The overall results suggest that gender diversity in the board of directors does not have a positive effect on firm performance and, using Scale Decisions as dependent variable, negatively affects firm performance. Farrell and Hersch (2004) explain this by arguing that
boards may also respond to outside pressures to add women directors. This means that boards may choose female directors because of external forces instead of choosing female directors because they are most competent for the job. Another explanation can be that monitoring reduces firm performance for firms that are well-governed, as concluded by Adams and Ferreira (2009). Since women tend to sit on monitoring-related committees more than men, gender diversity can (in well-governed firms) lead to overmonitoring. The costs as a result of overmonitoring may then reduce firm performance.
Discussion
Although the sample consists of 465 firms, data from only one year is used. To investigate the relationship between gender diversity in the boardroom and firm performance over a longer period, more years could be used.
Another limitation is that of endogeneity problems. Carter et al. (2003) report reverse causality between firm value, as measured by Tobin’s Q, and the percentage of women on the board. Campbell and Minguez-Vera (2007) however do not find a significant impact of firm value, also measured by Tobin’s Q, on the percentage of women. Since this research is partly based on the paper of Campbell and Minguez-Vera (2007), I didn’t expect the reverse causality problem to be significant. However, it is not clear what the precise connection is and therefore approaching the topic with 2SLS might be more suitable.
Future research could focus on the effect of gender quotas in more detail. Ahern and Dittmar (2012) already investigated this for Norway and their results indicated a negative impact of the gender quota on firm performance. This topic remains interesting because more countries have implemented a gender quota or are considering to do so. Some governments believe that a quota would improve firm performance and other governments just respond to outside pressures. A larger time period and more countries are needed to investigate the long term effects of gender quotas.
Conclusion
In this paper the relationship between gender diversity in the board of directors and firm performance is investigated. Out of all previous studies, there is no definitive empirical evidence that the presence of female directors in the boardroom increases firm performance. While most studies use Tobin’s Q as an approximation of firm performance, this paper uses two alternative performance measures as approximations of firm performance. One alternative performance measure focuses on scale decisions and the other alternative performance measure
focuses on operating expenses. Gender diversity is measured by the percentage of women on the board of directors and a sample of 465 S&P 500 firms is used.
The results show positive coefficients of gender diversity in the regressions with the alternative performance measures as dependent variables. These positive coefficients imply a negative effect of gender diversity in the boardroom on firm performance. In the regression with Tobin’s Q as dependent variable, the coefficient is negative, implying a negative effect of gender diversity in the boardroom on firm performance as well. However, only the coefficient of the alternative performance measure that focuses on Scale Decisions is significant. An explanation for this could be that boards with more female directors might be more hesitant to invest, which leads to underinvestment and thus to bad scale decisions.
Overall, these results provide evidence of a negative relation between firm performance and gender diversity on the board of directors, but further research is needed to investigate the accuracy of the alternative performance measures.
References
Adams, R. and Ferreira, D., 2009. Women in the boardroom and their impact on governance and performance. Journal of Financial Economics. Vol. 94: 291-309.
Ahern, K. R. And Dittmar, A. K., 2012. The changing of the boards: the impact on firm valuation of mandated female board representation*. The Quarterly Journal of
Economics. Vol. 127: 137-197.
Campbell, K. And Minguez-Vera, A., 2008. Gender Diversity in the Boardroom and Firm Financial Performance. Journal of Business Ethics. Vol. 83: 435-451.
Campbell, R. H., 1996. Letters tot he Editor: CEO vs. Nun: It’s a Draw. Wall Street Journal. August 12, Section A.
Catalyst: 2004. The Bottom Line: Connecting Corporate Performance and Gender Diversity (Catalyst, New York).
Catalyst: 2014. Catalyst Census: Fortune 500 Women Board Directors (Catalyst, New York) Catalyst: 2014. Catalyst Research: Catalyst, Historical List of Women CEOs of the Fortune Lists: 1972-2013 (Catalyst, New York).
Carter, D., Simkins, B. and Simpson G., 2003. Corporate Governance, Board Diversity, and Firm Value. The Financial Review 38: 33-55.
Dybvig, P. H. and Warachka, M., 2012. Tobin’s Q Does Not Measure Firm Performance: Theory, Empirics and Alternative Measures*.
Earley, P. C. and Mosakowski, E., 2000. Creating Hybrid Team Cultures: An Empirical Test of Transnational Team Functioning. The Academy of Management Journal. Vol. 43(1): 26-49.
Farrell, K. A. And Hersch, P. L., 2005. Additions to corporate boards: the effect of gender. Journal of Corporate Finance. Vol. 11: 85-106.
Gneezy, U., Niederle, M. and Rustichini., A. 2003. Performance in competitive environments: gender differences*. The Quarterly Journal of Economics. Vol. 118(3): 1049-1074. Isidro, H. and Sobral, M., 2014. The Effects of Women on Corporate Boards on Firm Value, Financial Performance, and Ethical and Social Compliance. Journal of Business
Ethics. Vol. 132(1): 1-19.
Jensen, M. C., 1986. The Agency Cost of Free Cash Flow: Corporate Finance and Takeovers. American Economic Review, Vol. 76(2): 323-329
Rose, C., 2007. Does female board representation influence firm performance? The Danish evidence. Corporate Governance: An International Review, 15 (2): 404-413.
Shrader, C., Blackburn, V. And Iles, P., 1997. Women In Management And Firm Financial Performance: An Exploratory Study. Journal of Managerial Issues. Vol. 9(3): 355- 372.
Smith, N., Smith, V. and Verner, M., 2006. Do women in top management affect firm performance? A panel study of 2,500 Danish firms. International Journal of
Productivity and Performance Management. Vol. 55(7): 569-593.
Yermack, D., 1996. Higher market valuation of companies with a small board of directors. Journal of Financial Economics. Vol. 40: 185-211.
