The effect of gender quotas on the quality of corporate
governance
Institution: University of Amsterdam
Degree: MSc Corporate Finance
Type: Master thesis
Title: The effect of gender quotas on the quality of corporate governance
Name: Vera Louwen
Date: June 2018
Supervisor: Evgenia Zhivotova
Abstract
This thesis examines the potential enhancement of the quality of corporate governance caused by the gender quotas adopted in European Union countries. The findings are that gender-diverse boards enhance the quality of corporate governance through the monitoring process, their role model position to stimulate women in the corporation and to question the status-quo and decision making process by being less persistent regarding corporate policies. This is consistent with the hypothesis. The finding that gender-diverse boards do not have an effect on the risk of corporate policies is inconsistent with the hypothesis. Mandated quota country firms enhance the quality of corporate governance through the monitoring process to a greater extent than target quota country firms which is consistent with the hypothesis. The difference between firms located in mandated or target quota countries is insignificant for the quality of corporate governance through the role model position and the risk of corporate policies. This is inconsistent with the hypothesis.
2 Table of Contents
1. Introduction……….3
2. Literature review……….6
2.1 Gender quotas………...…6
2.2 Rationale behind gender-diverse boards………...7
2.3 Individual differences………...9
2.4 The quality of corporate governance………..10
2.4.1 Monitoring………..10
2.4.2 Females in the corporation………..10
2.4.3 Corporate policies………...…11
3. Methodology……….………13
3.1 Control variables……….…15
3.2 Regressions……….…16
4. Data, empirical results and discussion………..………18
4.1 Data……….……18
4.2 Empirical results and discussion……….…25
4.3 Robustness checks………..….42
5. Conclusion, discussion, implications and recommendations...………..47
5.1 Conclusion………..47
5.2 Discussion, implications and recommendations……….49
6. References……….…52
7. Appendices…...……….53
Statement of originality
This document is written by Vera Louwen 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.
3 1. Introduction
Nowadays, there is a current governance issue related to diversity. The board of directors is an internal governance mechanism to align the shareholders’ interests with those of the managers and to discipline the management. Norway was the first country adopting a mandating quota in 2008 and almost all European Union countries followed with either a mandated quota, a target quota or a reporting requirement with a comply-or-explain rule in place to strengthen the gender diversity on corporate boards and address this governance issue.
Despite the adoption of quotas in most European Union countries, the effect of a gender-diverse board following these quotas is not straightforward. The benefits of diverse boards are the varied perspectives, ideas, backgrounds, experiences and skills of the directors. Female directors are expected to contribute to the board in a different manner than male directors; the board composition changes which adjusts the group thoughts due to the higher demand of monitoring of females, greater discussion on the groupthink and their role as minority on the board. The varied perspectives and backgrounds of the diverse directors will align the interests of all shareholders and management in a better way. On the other hand, diverse boards can provide potential costs such as communication and coordination problems due to the different background of the directors. This can make decision making difficult and time consuming. To examine the potential beneficial effects of the quotas, the better
alignment of the shareholders’ and managers’ interests through additional monitoring, the main research question of this research is: Will the gender quotas in European Union countries enhance the quality of corporate governance?
The contribution of this research lies in the investigation of the gender quotas of the European Union countries. Most existing literature investigates the effect of gender-diverse boards using United States firms that do not have to obey to a quota, because the United States did not adopt a quota. Other research only use the firms of the country that adopted a quota first; Norway. This research will examine all European Union countries that obtained a mandated quota, a target quota or a reporting requirement. In this manner there can be made a
comparison of the effects of multiple and different quotas. This research also adds to the literature by using the firms that are located in countries that have adopted different quotas to see the potential different effects of the different quotas instead of only the potential effects of gender-diverse boards which is the ultimate objective of the quotas.
Another contribution of this research is that the effect of gender-diverse boards following the quotas will be examined on the quality of corporate governance. Nearly all
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existing literature examine the gender-diverse board effects on firm performance. However the task of the board of directors is to align the shareholders’ interests with those of the managers and the benefits of a diverse board are explained as the enhancement of this task by improving the monitoring. This beneficial development of a gender-diverse board cannot be observed through firm performance, but by the quality of corporate governance. A few papers look at the quality of corporate governance, but these analyses only look at a part of the quality of corporate governance. For example Adams and Ferreira (2009) examine the attendance records which enhanced due to the addition of female directors, but their research mainly investigates the women directors’ impact on firm performance. Bernile, Bhagwat and Yonker (2017) investigate the effect of diverse boards on corporate policies but are primarily focused on risk. This research investigates the effect of gender-diverse boards on the quality of corporate governance. The potential beneficial effects of gender-diverse boards due to the quotas can be acknowledged using the following three different areas of the quality of corporate governance: monitoring, the addition of females in the entire company and corporate policies. This research contributes to the existing literature by examining the persistency as well as the risk of financial, investment and employee turnover policies using different financial and investment ratios. This research will also examine the differences between male and female directors. In this manner the contribution of female directors and the potential change of the male directors following the diversity in the board composition can be examined. This comparison between male and female directors explains if the impact of the gender-diverse boards is due to the specific characteristics and behavior of the added female directors or the overall change in board composition.
Another contribution of this research is the broad overview of the quotas adopted in the European Union and the psychological factors that explain the necessity of a gender quota on corporate boards. The rationale behind gender-diverse boards and the minority of female directors on corporate boards will be explained using psychological factors such as tokenism, agency theory and resource-dependency theory. The rationale behind gender-diverse boards and the gender quotas are critical to clarify the objectives of the adoption of gender quotas.
The potential endogeneity problem is the reverse causality of the relationship between the gender diversity and the quality of corporate governance. The higher demand for female directors caused by the quota could induce female directors to choose firms with higher quality of corporate governance or firms with a higher quality of corporate governance increases the gender diversity to address the external pressures. The employment of the Two Stage Least Squares regression solves the endogeneity issue: using the instrumental variable
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assures the causality of the relationship between the effect of gender-diverse boards following the quotas on the quality of corporate governance. The adopted instrument is the gender balance of the local director pool of the country the firm is located which satisfies the relevance and exclusion restriction condition. The difference-in-difference method will also be used to compare the quality of corporate governance before and after the quota and to compare the different effects of the mandated quotas, the target quotas and the reporting requirements on the quality of corporate governance. The main findings are that quotas and the followed gender-diverse boards enhance the quality of corporate governance through additional monitoring and being less persistent concerning corporate policies. This is consistent with the hypothesis. Gender-diverse boards do have a positive effect on the percentage of female employees, but this is not evident when investigating the effect of the quotas using the difference-in-difference method. Quotas and gender-diverse boards do not have a significant impact on corporate policies. This is inconsistent with the hypothesis.
In chapter 2 the related literature will be discussed. First, information is given on the gender quotas in place in the European Union and the rationale behind gender-diverse boards. Then the related literature on individual as well as on the quality of corporate governance is analyzed with a deviation of the quality of corporate governance in the three parts monitoring, females in the corporation and corporate policies which leads to the hypothesis.
Chapter 3 discusses the methodology how the hypothesis will be tested. The individual differences will be tested using univariate comparisons. The effect of the gender-diverse boards on the quality of corporate governance will be tested with 2SLS regressions using the instrumental variable. Thereafter the difference-in-difference method will be executed to set off the effects of the different quotas and the period before and after the quota adoption.
Chapter 4 describes the collected data and the data sources used. The summary statistics will also be interpreted. Thereafter the results of the tests performed are presented, discussed with their economic meaning and linked to the hypothesis. Chapter 4 also presents the robustness checks which verify the previous results by excluding data during the financial crisis, using firms located in reporting requirement countries as control group rather than using firms located in target quota countries and replace the monitoring variable independent board members to non-executive board members.
Chapter 5 draws a conclusion on this research and discusses the expectations and findings in the context of the existing literature. This chapter also includes the discussion on the limitations of this research, implications following this research and directions for future research. The supplementary chapters 6 and 7 include the reference list and the appendices.
6 2. Literature review
The literature review will discuss the effects of the female board quotas on the quality of corporate governance. First the gender quotas in the European Union will be explained. Then the rationale behind the gender-diverse boards is explained using psychological factors. Thereafter there will be made a comparison between female and male directors to look at the specific contribution of female directors. At last, the effects of the gender quotas on the quality of corporate governance will be discussed which is separated into monitoring, females in the corporation and corporate policies.
2.1 Gender quotas
Teigen (2012) explains that the gender quota legislation for boards originated in Norway and is spreading to other European countries. The author states that a follow-the-leader
mechanism of Norway caused by their financial and gender equality success explains this spreading of the quota (Teigen, 2012). The gender quota legislation has two ethical aspects; equally competent women may be underrepresented due to gender self-schemas and status characteristics theory, another aspect could be that women are being assigned as director while they are not the most qualified directors (Terjesen, Aguilera and Lorenz, 2015). Gender self-schemas are mental models through which information is processed (Terjesen, Sealy and Singh, 2009). Male gender self-schemas contain achievement, dominance and agression, while female gender self-schemas consist of nurturance, affiliation to others and obeisance (Konrad, Ritchie, Lieb and Corrigall, 2000). These gender self-schemas are also the expectations of gender-appropriate behavior in the workplace and could be the reason why women are underrepresented (Terjesen, Sealy and Singh, 2009). The status characteristics theory, explained by Hillman, Cannella and Harris (2002), states that a minority group
member has to give more evidence of ability than a majority group member. These minorities need to show a higher level of ability to be perceived as equally competent as the majorities which could be another reason of the female underrepresentation on corporate boards. The European Union countries that have a mandating quota are Austria, Belgium, France, Germany, Greece, Italy and Norway (European Commission, 2016). Austria mandated a quota of 30% in 2018. Belgium has a 33.3% quota assigned in 2016 with the sanctions of the annulment of director appointments and the loss of director compensations. France has a 40% quota assigned in 2016 with the sanctions of the annulment of director assignation and the loss of director fees. Germany assigned a 30% quota in 2016 with the sanction to set
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quantitative objectives to comply. Greece has a 33% quota in place. Italy assigned the 30% quota in 2015 with the sanctions of fines for noncompliance and eventually the annulment of the board position. Norway has mandated the 40% quota in 2008 with the sanctions of fines and eventually the termination of the company (European Commission, 2016).
The European Union countries that have a target quota are Finland, Ireland, the Netherlands, Poland and Spain. Finland targeted one women in 2008, Ireland 25% in 2015, the Netherlands 30% in 2016, Poland 30% in 2015 and Spain 40% in 2015. The comply-or-explain rule is the sanction of non-compliance for Finland, the Netherlands and Spain; however in Spain the non-compliance is taken into account regarding subsidies and state contracts. The European Union countries Denmark (2008), Luxembourg (2013), Sweden (2004) and the United Kingdom (2012) have a reporting requirement with the comply-or-explain rule (European Commission, 2016).
Terjesen, Sealy and Singh (2009) explain that research of the effect of the quota could lead to misinterpretation if the quota does not include all organization forms but these firms are included in the dataset. It matters which organization forms are incorporated in the quota; it is important to know which forms are involved in the quota to interpret the data correctly. Bøhren and Staubo (2013) investigate the exit option of Norwegian firms following the mandated quota. The ASA organizational form is exposed to the gender quota, the AS form not (Bøhren and Staubo, 2013). The authors find that half of the firms exposed to the quota exit which implies that the benefits of keeping the organizational form is lower than the costs to obey to the law. These findings are important for the reason that the organizational forms need to be taken into consideration when looking at the effect of the gender quota. Only Greece and Spain have a quota that only applies to the Stated Owned Enterprises when looking at the organizational forms incorporated in the quota. The other quotas also hold for listed companies (European Commission, 2016).
2.2 Rationale behind gender-diverse boards
The board of directors is an internal governance mechanism to align the shareholders’
interests with those of the managers and to discipline the management. A current governance issue faced nowadays are relating to diversity (Kang, Cheng and Gray, 2007). This is
displayed with the gender quotas in the European Union.
A psychological factor that explains the rationale of gender-diverse boards is
tokenism. In the light of tokenism, people seek to surround themselves with people that have the same perceptions. Adding minorities to the group is only to create the impression of
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diversity caused by outside pressures (Terjesen, Sealy and Singh, 2009). Farrell and Hersch (2005) find that the probability of an additional women on the board is negatively related to the number of women already on the board and positively related to the number of women leaving the board. This shows that the selection of a director is not gender neutral. These findings are consistent with the tokenism that firms add women due to external pressures. Campbell and Minguez-Vera (2008) find that the diversity on the board has a positive effect on firm value, not the presence of female directors on the board. This shows that the focus of gender-diversity should be on the balance between men and women on the board rather than the presence of female directors (Campbell and Minguez-Vera, 2008).
Ingley and Van der Walt (2003) explain that the rationale behind diverse boards are the agency theory and the resource dependency theory. The agency theory states that the board should protect the shareholders’ interests from self-interests of the management by better monitoring the management (Ingley and Van der Walt, 2003). The varied perspectives, ideas, backgrounds, experiences and skills of the directors of a gender-diverse board improves monitoring (Anderson, Reeb, Upadhyay and Zhao, 2011). Diverse boards contain more
independent directors which monitor additionally (Adams and Ferreira, 2009).
The resource-dependence theory states that the board can be seen as a resource for the firm using expertise, information flow channels and legitimacy of directors (Hillman,
Cannella and Harris, 2002). Ingley and Van der Walt (2003) explain that there needs to be diversity in the board to attain these resources. Nielsen and Huse (2010) explain that it is not the gender per se but the different characteristics women possess that enable them to
contribute to the board. The discussion of this literature is useful to show that just adding females to the board is not effective; they need to be able to contribute.
The benefits of diverse boards are the varied perspectives, ideas, backgrounds, experiences and skills of the directors which improves the monitoring and advising role of directors (Anderson, Reeb, Upadhyay and Zhao, 2011). On the other hand, the authors mention the potential costs diverse boards can provide such as communication and coordination problems due to the different background of the directors. This can make decision making difficult and time consuming (Giannetti and Zhao, 2016). Gul, Srinidhi and Ng (2011) argue that gender-diverse boards can have beneficial effects when the tasks needed to work on are creative and complex but detrimental when the tasks are simple and structured.
9 2.3 Individual differences
Niederle and Vesterlund (2007) look for a reason why women are underrepresented in top functions of firms and they find that men and women respond differently to competitive environments, besides the role that differences in ability or preferences play. The selection into a competitive environment is different for men and women: women do not appreciate a competitive element in their compensation scheme while men love it (Niederle and
Vesterlund, 2007). However Adams and Funk (2012) show that female and male directors differ in different ways than the gender differences in the general population. The
investigation among directors result in the finding that female directors are more benevolent, risk loving and universally concerned than male directors. On the other hand, Adams and Funk find that female directors are less power, tradition and security oriented than male directors (2012). These results show that having women on the board does not necessarily lead to more risk-averse decision making as is often thought following the female gender self-schema.
Ahern and Dittmar (2012) investigate the change in directors due to the quota implementation in Norway and found that the new female directors replacing the male directors were on average eight years younger and are less experienced. This is consistent with the smaller supply of female directors caused by the gender self-schema that women are not expected in a top function. The authors also find that the retaining male directors are older and are more experienced than the exiting male directors (Ahern and Dittmar, 2012). The expectation following this literature is that female directors are less experienced and younger than male directors.
The status characteristics theory, explained by Hillman, Cannella and Harris (2002), states that a minority group member has to give more evidence of ability than a majority group member. Following this theory the expectation is that female directors obtained a higher education, because they have to give more evidence of ability as minorities compared to male directors to be perceived as equally competent as male directors (Hillman, Cannella and Harris 2002). The implications of this expectation is that females lack experience but augment the academical knowledge of the board which brings new and different ideas and perspectives to the board.
The expectation that female directors are more independent than their male
counterparts is caused by their additional monitoring and their role as minority member in the board. Female directors bring other and diverse perspectives and ideas to the board being a
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minority in the board. Female directors are more likely to demand higher monitoring, because they want to promote shareholder interests and avoid legal liability (Gul, Srinidhi and Tsui, 2008). Female directors are more likely to join a committee due to this additional component which extends monitoring (Adams and Ferreira, 2009). Ahern and Dittmar (2012) find that female directors are more independent. These descriptions lead to the expectation that female directors are more likely to join a committee than male directors and especially the audit committee which shows the additional monitoring of female directors.
To summarize the individual differences between male and female directors, the expectations are that female directors will be less experienced, younger, higher educated and demand additional monitoring what will be shown by a higher likelihood of being a committee member and a larger amount of audit committees than male directors.
2.4 The quality of corporate governance
2.4.1 Monitoring
The expectation is that gender-diverse boards monitor better through better attendance records of all directors, more board meetings, increased independence due to the additional female directors and increased independent committees through the higher likelihood of a female director committee membership. Female directors have better attendance records than male directors and male directors have fewer attendance problems if the board is more diverse (Adams and Ferreira, 2009). The increased number of board meetings of gender-diverse boards is another addition of the monitoring of the board (Gul, Srinidhi and Tsui, 2008 and Gianetti and Zhao, 2016). It is mentioned that if these expectations are true and gender-diverse board monitor additionally, gender-diverse boards can be seen as an important corporate governance instrument which enhances the quality of corporate governance
(Campbell and Minguez-Vera, 2008, and Gul, Srinidhi and Ng, 2011).
To summarize the monitoring of gender-diverse boards, these boards are expected to have a higher proportion independent directors on the board and committees, better board and committee attendance records and more board meetings. This shows that gender-diverse boards enhance the quality of corporate governance due to the additional monitoring. 2.4.2 Females in the corporation
One aspect of the impact of women directors is the visibility on a top function in companies. Their role model position can contribute to the gender equality in higher functions and the
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whole corporation (Bilimoria, 2006). Bilimoria (2006) finds that an increase in the number of female directors increases the number of females in top management functions such as executives, line executives and line officers. It is also found that the presence of female directors increase the number of female managers and female CEOs even after controlling for industry and firm differences (Matsa and Miller, 2011). These authors explain that the female share of the board may increase the desire to hire female executives. Following this literature there are more female top managers expected in firms with gender-diverse boards. The increase of female managers enhances the quality of corporate governance in the manner that all different opinions, ideas, perspectives and backgrounds of the shareholders should be on the board and preferably in the entire company to be able to align the shareholders’ interests with those of managers better.
2.4.3 Corporate policies
Bernile, Bhagwat and Yonker (2017), Ahern and Dittmar (2012) and Matsa and Miller (2013) investigate the impact of diverse boards on corporate policies. Diversity could lead to
moderated decisions caused by the added heterogeneity of the perspectives, ideas and
backgrounds of the diverse directors. This heterogeneity leads to better monitoring and greater discussion of the proposed policies which could moderate decisions. Nonetheless, diversity could lead to conflicts, making decision making difficult and time consuming (Giannetti and Zhao, 2016). This disruption could lead to more unstable policies.
Bernile, Bhagwat and Yonker (2017) find that the persistence of financial and investment policies increases with board diversity, which shows that gender-diverse boards make moderate decisions. Gianetti and Zhao (2016) find that firms with diverse boards have less persistent strategies. Consistent with the possibility that diverse boards could lead to conflicts, director turnover is higher in firms with diverse boards (Gianetti and Zhao, 2016). The expectation is that gender-diverse boards will influence corporate policies by being less persistent due to the additional monitoring and discussion during the decision process of corporate policies. This enhances the quality of corporate governance due to the better alignment of the shareholders and managements’ interests caused by the additional monitoring and discussion during decision making on the management.
Bernile, Bhagwat and Yonker (2017) also find that gender-diverse board firms adopt less risk in financial policies, but more risk in investment policies. The riskier investment policies are justified by the higher efficiency shown with the additional innovation output (Bernile, Bhagwat and Yonker, 2017). However, Ahern and Dittmar (2012) examine the
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impact of the Norwegian gender quota on financial and investment policies and find different results; increased risk in financial policies, increased acquisitions and a small decrease in capital expenditures. This inconclusivity is an opportunity to investigate the effect of gender-diverse boards on corporate policies. The expectation is that gender-gender-diverse boards will influence corporate policies by using less risk in financial policies and using more risk in investment policies which increases efficiency. The lower risk taken in financial policies is expected to enhance the quality of corporate governance due to the better alignment of the shareholders and managements’ interests; there is more assurance towards the shareholders when there is less risk involved. However the quality of corporate governance will only be enhanced by a risk increase in investment policies if the innovation output will also increase as a result of a better allocation of research and development expenses. The quality of corporate governance will deteriorate if the innovation output shall not increase because this shows that gender-diverse boards make more speculative decisions.
Another effect on corporate policies found following the adoption of the gender quota in Norway was the reduction in employee layoff in affected firms which resulted in higher labor costs (Matsa and Miller, 2013). The authors state that this shows that gender-diverse boards can affect corporate strategy. The increase in labor costs reduces the profits which is not aligned with the shareholders’ interests if there is no necessity for lower employee layoff rates. This shows the expectation that gender-diverse boards will result in a deterioration of the quality of corporate governance due to a reduction in employee layoff.
This leads to the expectation that gender-diverse boards will influence corporate policies by being less persistent, use less risk in financial policies, use more risk in investment policies which increases innovation output, have a lower employee layoff which increases labor costs. The influence of gender-diverse boards on corporate policies will all enhance the quality of corporate governance besides the lower employee layoff and the additional risk in investment policies if there is no increase in innovation output. This research is an addition to the
discussed related literature due to the investigation of the persistency as well as the risk on the financial, investment and employee turnover corporate policies and the adoption of different financial and investment ratios to affirm the possible effect of gender-diverse boards.
To conclude the effect of gender-diverse boards on the quality of corporate governance, gender-diverse boards are expected to enhance the quality of corporate governance through additional monitoring, an increasing number of females in the management and their impact on the persistency and risk of financial, investment and employee turnover corporate policies.
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Hypothesis: Gender-diverse boards following the gender quotas enhance the quality of corporate governance through additional monitoring, an increasing number of females in the management and their impact on the persistency and risk of financial, investment and
employee turnover corporate policies.
3. Methodology
First there will be univariate tests performed to look at the individual differences of male and female directors on experience, age, education, being a committee member and the number of audit committees. These tests will show which characteristics are different comparing female directors with their male counterparts. The expectation is that female directors are less experienced, younger, higher educated, more likely to be joining a committee and have more audit committees than male directors.
Thereafter the effects of gender-diverse boards on the quality of corporate governance will be investigated. Gender-diverse boards are expected to enhance the quality of corporate
governance through a higher proportion of independent directors on the board as well as on committees, higher board and committee attendance records, more board meetings, more females in the corporation, less persistent corporate policies, less risk in financial policies, more risk in investment policies which is expected to be made up by an increased innovation output. Gender-diverse boards are expected to deteriorate the quality of corporate governance through a lower employee layoff which increases labor costs.
A potential problem of analyzing the influence of gender-diverse boards on the quality of corporate governance is the endogeneity issue (Adams, Hermalin and Weisbach, 2010). As a result of the quota, the gender-diverse boards could enhance the quality of corporate
governance. Nonetheless the causality could also be contrarily: the higher demand for female directors caused by the quota could induce female directors to choose firms with higher quality of corporate governance or firms with a higher quality of corporate governance increases the gender diversity to address the external pressures (Anderson, Reeb, Upadhyay and Zhao, 2011). The solution to overcome this endogeneity issue is the use of an
instrumental variable. The instrument chosen is the gender balance of the local director pool. Wahid (2018) uses the female population at the firm’s headquarter location to analyze the causal relationship between board gender diversity and financial misconduct. Knyazeva,
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Knyazeva and Masulis (2013) show that the local director pool is related to the board independence and utilize the local supply of directors as instrumental variable. The idea behind this instrument is that the gender balance of the directors in the country the firm is located in predicts the gender balance of directors for this firm due to the stability of the firm location, the local supply of directors and the external pressure for gender diversity by the countries’ population.
Using this instrumental variable for gender-diverse boards in the first-stage of the two-stage least squares regression, the causality of the relationship between gender-diverse boards and the quality of corporate governance can be investigated. The instrumental variable has to compel on the two requirements to predict this causality; the relevance and the exclusion restriction conditions. The relevance condition states that the instrument should be correlated with the endogenous explanatory variable the gender balance in boards. The exclusion
restriction condition explains that the instrument should only be correlated with the dependent variable, the quality of corporate governance, through the explanatory variable; it should not be correlated with the error term (Stock and Watson, 2011).
The relevance condition is satisfied, because the gender balance of the local director pool is positively correlated with the firms gender balance of directors on the board. This relevance is supported by the significant findings of the instrumental variable coefficient in the first-stage statistics presented in the first column of Table 4 with a 0.01% significance level and the instrumental variable strength shown by the Cragg-Donald Wald F-statistic of 447.063.
Now the possible relationship between the gender balance of the local director pool and the error term will be looked at for the exclusion restriction condition. A country with a gender-balanced director supply could lead to overall higher female employment which is not only caused by the role model effect of the gender-diverse board, but by the general
acceptance and external pressure for gender diversity in the workplace of the country. A country with a gender-balanced director supply could also be a result of the population committing to strong corporate governance and solving associated issues. These potential relationships can be overcome by including country fixed effects.
15 3.1 Control variables
In this section the important control variables following the related literature are discussed. Anderson, Reeb, Upadhyay and Zhao (2011) explain that complex firms are more likely to have a diverse board than simple firms due to the operational complexity. Managers need a more extensive expertise and knowledge of the different business lines and the managers can obtain these additional advising needs from the various backgrounds, expertise and
experience of the diverse board directors (Hillman, Shropshire and Cannella, 2007). Gul, Srinidhi and Tsui (2008) also show that larger and older firms are more likely to have gender-diverse boards. Carter, Simkins and Simpson (2003) find that the number of female directors increases with the board size. The expectation based on this literature is that more complex, larger and older firms and larger boards are more likely to have a gender-diverse board.
Shareholder concentration and rights also affect the diversity on boards. Kang, Cheng and Gray (2007) find that the level of shareholder concentration has a negative relationship to gender diversity. This implies that the demand for a gender-diverse board is larger when there is low shareholder concentration which is the case when the shares are held by more diverse shareholder groups. The pressure for a gender-diverse board for a firm with high shareholder concentration is low (Kang, Cheng and Gray, 2007). Adams and Ferreira (2009) explain that companies with weak shareholder rights benefit from gender diversity, but have detrimental effects for strong shareholder rights companies. It is explained that gender-diverse boards only have beneficial effects when additional monitoring is necessary, which is the case for a widely held company (Adams and Ferreira, 2009). It is expected that shareholder
concentration and shareholder rights are negatively related to the likelihood of having a gender-diverse board.
The effect of gender-diverse boards can also differentiate between industries. Hillman, Shropshire and Cannella (2007) argue that industries with large female employment are more likely to have a gender-diverse board; this improves the legitimacy according to the resource-dependence theory. This theory states that the board can be seen as a resource for the firm using expertise, information flow channels and legitimacy of directors (Hillman, Cannella and Harris, 2002). Following this literature it is expected that industries with large female
employment are more likely to have a gender-diverse board. Bilimoria (2006) find a higher number of female top managers in service and transportation industries, such as health care, advertising, entertainment, hotels, airlines, railroads, mail and trucking. Financial industries are more likely to have female top managers with powerful titles (Bilimoria, 2006). Kang,
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Cheng and Gray (2007) investigate board diversity and independence of Australian companies and find a positive relationship between age diversity and industry type; consumer services and production industries have appointed more age diverse directors. However the authors do not find a relationship between gender diversity and industry type. These contradictive
findings lead to a contribution to investigate the relationship between gender-diverse boards and industries. It is expected that there is a relationship between industries and having a gender-diverse board due to legitimacy. For these reasons the industry fixed effects will be included. The year fixed effects should also be incorporated into the regressions to control for the increasing trend of greater female representation (Matsa and Miller, 2011).
The expectations following the discussed literature on control variables are the more complex, larger and older the firm is with lower shareholder concentration or rights and a larger board, the more likely the firm has a gender-diverse board. The industry and year fixed effects are also included to control for a potential trend in female representation across time and industry.
3.2 Regressions
The two-stage least squares regression can now be performed using the instrumental variable to overcome the endogeneity issue and test the causality of the gender balance in boards following the mandating quota on the quality of corporate governance. The first stage regression tests the effect of the instrument the gender balance of the local director pool on the gender diversity in the boards including the control variables. The second stage will regress the outcome of the first stage regression, the gender-diversity, on the dependent variables to test the quality of corporate governance. These dependent variables are the proportion of independent directors on the board as well as on committees, the board and committee attendance records, the number of board meetings, the number of females in the corporation, the persistency and risk of financial, investment and employee turnover policies and innovation output. The only deviation is the exclusion of complexity in the regressions with dependent variables total debt to common equity and the capital expenditures to total assets due to the incorporation in the complexity measure of these variables. The complexity is also excluded for the first stage regression for the regression on total debt to common equity and capital expenditures to total assets.
First stage regression: 𝑔𝑒𝑛𝑑𝑒𝑟 𝑏𝑎𝑙𝑎𝑛𝑐𝑒 𝑖𝑛 𝑏𝑜𝑎𝑟𝑑̂ 𝑖𝑡 = 𝛽1 ∗
𝑔𝑒𝑛𝑑𝑒𝑟 𝑏𝑎𝑙𝑎𝑛𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑙𝑜𝑐𝑎𝑙 𝑑𝑖𝑟𝑒𝑐𝑡𝑜𝑟 𝑝𝑜𝑜𝑙𝑖𝑡+ 𝛽2∗ 𝑐𝑜𝑚𝑝𝑙𝑒𝑥𝑖𝑡𝑦 𝑓𝑖𝑟𝑚𝑖𝑡+ 𝛽3∗ 𝑎𝑔𝑒 𝑓𝑖𝑟𝑚𝑖𝑡+ 𝛽4∗ 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 𝑟𝑖𝑔ℎ𝑡𝑠𝑖𝑡+ 𝛽5 ∗ 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 𝑐𝑜𝑛𝑐𝑒𝑛𝑡𝑟𝑎𝑡𝑖𝑜𝑛𝑖𝑡+ 𝛽6 ∗
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𝑏𝑜𝑎𝑟𝑑 𝑠𝑖𝑧𝑒𝑖𝑡+ 𝛽7∗ 𝑓𝑖𝑟𝑚 𝑠𝑖𝑧𝑒𝑖𝑡+𝛽8∗ 𝑦𝑒𝑎𝑟 𝑓𝑖𝑥𝑒𝑑 𝑒𝑓𝑓𝑒𝑐𝑡𝑠𝑡+ 𝛽9∗ 𝑖𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝑓𝑖𝑥𝑒𝑑 𝑒𝑓𝑓𝑒𝑐𝑡𝑠𝑖
Second stage regression: 𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑡 𝑚𝑒𝑎𝑠𝑢𝑟𝑒𝑠 𝑜𝑓 𝑞𝑢𝑎𝑙𝑖𝑡𝑦 𝑜𝑓 𝑐𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝑔𝑜𝑣𝑒𝑟𝑛𝑎𝑛𝑐𝑒𝑖𝑡 = 𝛽1∗ 𝑔𝑒𝑛𝑑𝑒𝑟 𝑏𝑎𝑙𝑎𝑛𝑐𝑒 𝑖𝑛 𝑏𝑜𝑎𝑟𝑑̂ 𝑖𝑡 + 𝛽2 ∗ 𝑐𝑜𝑚𝑝𝑙𝑒𝑥𝑖𝑡𝑦 𝑓𝑖𝑟𝑚𝑖𝑡+ 𝛽3 ∗ 𝑎𝑔𝑒 𝑓𝑖𝑟𝑚𝑖𝑡+ 𝛽4 ∗ 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 𝑟𝑖𝑔ℎ𝑡𝑠𝑖𝑡+ 𝛽5 ∗ 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 𝑐𝑜𝑛𝑐𝑒𝑛𝑡𝑟𝑎𝑡𝑖𝑜𝑛𝑖𝑡+ 𝛽6 ∗ 𝑏𝑜𝑎𝑟𝑑 𝑠𝑖𝑧𝑒𝑖𝑡+ 𝛽7∗ 𝑓𝑖𝑟𝑚 𝑠𝑖𝑧𝑒𝑖𝑡+ 𝛽8 ∗ 𝑦𝑒𝑎𝑟 𝑓𝑖𝑥𝑒𝑑 𝑒𝑓𝑓𝑒𝑐𝑡𝑠𝑡+𝛽9∗ 𝑖𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝑓𝑖𝑥𝑒𝑑 𝑒𝑓𝑓𝑒𝑐𝑡𝑠𝑖+ 𝛽10 ∗
𝑐𝑜𝑢𝑛𝑡𝑟𝑦 𝑓𝑖𝑥𝑒𝑑 𝑒𝑓𝑓𝑒𝑐𝑡𝑠𝑖
The persistency of corporate policies will be tested from year to year using the relationship of the corporate policies one year ahead and of the current year. The interaction of the current policy and the first-stage regression dependent variable of gender-diverse boards will also be incorporated to look at the effect of gender-diverse boards on the persistency of corporate policies. 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙, 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑎𝑛𝑑 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑝𝑜𝑙𝑖𝑐𝑖𝑒𝑠𝑖𝑡+1 = 𝛽1∗ 𝑔𝑒𝑛𝑑𝑒𝑟 𝑏𝑎𝑙𝑎𝑛𝑐𝑒 𝑖𝑛 𝑏𝑜𝑎𝑟𝑑̂ 𝑖𝑡+ 𝛽2 ∗ 𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙, 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑎𝑛𝑑 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑝𝑜𝑙𝑖𝑐𝑖𝑒𝑠𝑖𝑡+ 𝛽3∗ 𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙, 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑎𝑛𝑑 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑝𝑜𝑙𝑖𝑐𝑖𝑒𝑠𝑖𝑡∗ 𝑔𝑒𝑛𝑑𝑒𝑟 𝑏𝑎𝑙𝑎𝑛𝑐𝑒 𝑖𝑛 𝑏𝑜𝑎𝑟𝑑̂ 𝑖𝑡 + 𝛽4 ∗ 𝑐𝑜𝑚𝑝𝑙𝑒𝑥𝑖𝑡𝑦 𝑓𝑖𝑟𝑚𝑖𝑡+ 𝛽5 ∗ 𝑎𝑔𝑒 𝑓𝑖𝑟𝑚𝑖𝑡+ 𝛽6∗ 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 𝑟𝑖𝑔ℎ𝑡𝑠𝑖𝑡+ 𝛽7 ∗ 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 𝑐𝑜𝑛𝑐𝑒𝑛𝑡𝑟𝑎𝑡𝑖𝑜𝑛𝑖𝑡+ 𝛽8 ∗ 𝑏𝑜𝑎𝑟𝑑 𝑠𝑖𝑧𝑒𝑖𝑡+ 𝛽9∗ 𝑓𝑖𝑟𝑚 𝑠𝑖𝑧𝑒𝑖𝑡+ 𝛽10∗ 𝑦𝑒𝑎𝑟 𝑓𝑖𝑥𝑒𝑑 𝑒𝑓𝑓𝑒𝑐𝑡𝑠𝑡+𝛽11 ∗ 𝑖𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝑓𝑖𝑥𝑒𝑑 𝑒𝑓𝑓𝑒𝑐𝑡𝑠𝑖+ 𝛽12 ∗ 𝑐𝑜𝑢𝑛𝑡𝑟𝑦 𝑓𝑖𝑥𝑒𝑑 𝑒𝑓𝑓𝑒𝑐𝑡𝑠𝑖
The effect of the gender-diverse boards following the quota will also be examined with a difference-in-difference analysis using the time period before and after the quota adoption and the treatment and control group. In this manner the effect of the mandating quota on the quality of the corporate governance of firms can be compared with the quality of corporate governance of firms in countries that adopted a target quota. The other comparison that will be made is the effect on the quality of corporate governance prior and after the quotas.
𝑑𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑡 𝑚𝑒𝑎𝑠𝑢𝑟𝑒𝑠 𝑜𝑓 𝑞𝑢𝑎𝑙𝑖𝑡𝑦 𝑜𝑓 𝑐𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝑔𝑜𝑣𝑒𝑟𝑛𝑎𝑛𝑐𝑒
18 4. Data, empirical results and discussion 4.1 Data
This section explains the variables of the data collection, mentions the data sources used for this data collection and analyzes the descriptive statistics of the data.
First, the European Union countries that obtained a mandated quota, a target quota or a reporting requirement needs to be identified and separated by the type of the gender-diverse rule. The countries Austria, Belgium, France, Germany, Greece, Italy and Norway adopted a mandating quota and combined these firms form the treatment group. The countries Finland, Ireland, the Netherlands, Poland and Spain have a target quota in place and form the control group. The countries Denmark, Luxembourg, Sweden and the United Kingdom have a reporting requirement and form an additional control group for a robustness check. The data to investigate the effect of the gender quotas on the quality of corporate governance is needed from these countries. The adoption year of the quota is also necessary to attain to create a dummy variable that equals one if the year is post adoption of the quota and zero if the year is prior adoption of the quota. The information on which organizational forms are included in the quota is also important to only collect those firms that are involved with the quota. Only Greece and Spain have a quota that only applies to the Stated Owned Enterprises when looking at the organizational forms incorporated in the quota. Due to the low number of observations of the Stated Owned Enterprises dummy variable, all firms of Greece and Spain are dropped as a precaution. The other quotas hold for listed companies. This quota-specific information is gathered from the European Commission (2016).
For the comparison of the individual characteristics and behavior of male and female directors data is needed of directors on gender, age, experience, education, the likelihood of being a committee member, the number of committees and the number of specifically audit,
nomination, compensation and corporate governance committees. This data is gathered from BoardEx Europe of the year 2013. Age and experience were the only variables obtained in a panel dataset with a time period from 1999 until 2013. The summary statistics are displayed by gender in Table 1. There are 8333 male directors and 1299 female directors observed; for the variables age and experience 129376 respectively 12632. The percentage of female directors over the years 1999 until 2013 is 9.81%. These statistics show that there are on average more male than female directors. The age of male directors lies between 15 and 96 with an average of about 56; for female directors this number lies between 21 and 89 with an
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average of about 51 year. The experience is measured as the number of years as director with a minimum of zero and a maximum of 67.5 years for male directors and 46.9 years for female directors. The education variable is manually selected by marking an bachelor or
undergraduate degree as a one, a master or postgraduate degree as a two and a PhD or doctorate as a three. The mean of 1.401 of female directors is higher than the mean of 1.383 of male directors. 32.4% of the male directors is a committee member, with a percentage of 38.9% for female directors. The maximum of committee memberships is 18 for male directors and 12 for female directors. Both have an average number of committee memberships of about 1. The number of committee memberships are divided into audit, nomination, compensation, corporate governance and other committees.
Table 1: Summary Statistics of the director characteristics
Male Directors Female Directors
Variable Obs Mean Std. Dev. Min Max Obs Mean Std. Dev. Min Max
Age 129.376 55.944 9.768 15 96 12.632 50.789 9.415 21 89 Experience 129.376 5.571 5.413 0 67.5 12.632 4.301 4.429 0 46.9 Education 8.333 1.383 0.786 0 3 1.299 1.401 0.774 0 3 Committee Member 8.333 0.324 0.468 0 1 1.299 0.389 0.488 0 1 # of Committees 8.333 1.157 1.569 0 18 1.299 1.189 1.551 0 12 # of Audit Committees 8.333 0.354 0.619 0 6 1.299 0.421 0.689 0 5 # of Nomination Committees 8.333 0.213 0.504 0 6 1.299 0.193 0.495 0 3 # of Compensation Committees 8.333 0.232 0.513 0 6 1.299 0.255 0.543 0 5 # of Corporate Governance Committees 8.333 0.026 0.168 0 2 1.299 0.030 0.184 0 2 # of Other Committees 8.333 0.332 0.706 0 8 1.299 0.290 0.605 0 6
This table reports the summary statistics of the director characteristics of 2013 reporting the variable in column 1, the number of observations, the mean, the standard deviation and the minimum and maximum value of the variable in the columns in the mentioned sequence for male and female directors separately. The variables age and experience are reported with the time period 1999 until 2013. All variables are defined in Table A.1 and rounded to three digits.
Data of the quality of corporate governance is necessary to investigate the effect of the gender-diverse boards on these variables. The variables are obtained from Datastream with a time period from 2004-2017 which results in a panel dataset. This time period is chosen, because it constructs a similar time frame for every European Union country; for every country with a gender-diverse rule in place in a specific year, there are a minimum of two years before and after the quota or reporting requirement date incorporated. This only does not hold for Austria and Sweden: Austria mandated the quota in 2017 and Sweden had a reporting requirement since 2004 so only the years before the mandating quota are incorporated of Austria and the years after the requirement are incorporated of Sweden.
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The treatment variable is a dummy variable that equals one if the firm is located in a mandated quota country and zero if the firm is located in a target quota or reporting
requirement country. The post variable is a dummy variable that equals one if the quota is stated in that specific year and zero otherwise. The summary statistics of the firms located in the mandated quota countries are presented in Table 2, those of the target quota countries are presented in Appendix A.3 and the reporting requirement countries in Appendix A.4. The data needed to research the section monitoring of the quality of corporate governance is the proportion independent directors on the board as well as on committees, the board and committee attendance records and the number of board meetings. The audit, compensation and nomination committee independence is the percentage of independent board members on the specific committee. The mean value of these variables are 59.46%, 68.97% and 54.07% which results in an above-average amount of independent board members on the committees. This can also be shown using the variables of the percentage non-executive board members on the audit, compensation and nomination committees with means of respectively 97.58%, 95.64% and 95.20%. The percentage independent and non-executive board members are lower, namely on average 40.19% and 90.64%. The board size varies from 1 to 44 board members with the mean at 13 board members. Strictly independent board members are defined as not employed by the company or a major shareholder, tenure not longer than ten years, no 5% owner, no family ties and no cross-board memberships. The average percentage of strictly independent directors on a board is 37.32%. The board and committee attendance average variables show the average attendance percentages at board meetings with a mean of 89.11% and 93.52%. The variable experienced board shows the average number of years each director is sitting on this board with an average of about 6 years and a maximum of almost 23 years. The number of board meetings lies between 1 and 36 with an average of about 8.
The main independent variable is the proportion of female directors on the board. Nonetheless the gender balance in the local director pool of the country the firm is located in is used instead as instrumental variable to verify the causality of the relationship of a gender-diverse board and the quality of corporate governance. The data needed for this instrumental variable is the gender balance of the local director pool. This is attained through the
nationality of the entire director base of BoardEx Europe and thereby calculating the gender balance of directors of the European Union countries with a mandated quota, target quota or reporting requirement. The percentage of female directors on the board is shown by the board diversity variable which has an average value of 17.80% and a maximum of 66.67%. The
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variable of the gender balance of directors in the country shows an average of 8.70% female directors with a minimum of 3.45% and a maximum of 17.90% in a country. The data needed to investigate the section females in the corporation is the number of women employees and women managers. The percentage of women employees and managers is on average 34.31% respectively 25.96% with a maximum of 100% and 65.44%.
The data gathered for the section corporate policies are the turnover of employees, debt to equity and dividends to equity for the financial policies, capital expenditures to assets, research and development costs to assets, acquisitions to assets and development costs to assets for the investment policies and the gross value of patents for the innovation output. The numerical variables gross value of brands and patents, capital expenditures to total assets, common shareholders’ equity, development costs to total assets, dividends per share to
common equity, net assets from acquisitions to total assets, research and development costs to total assets and total debt to common equity are interpretable as in an annual report. The negative values of total debt to common equity comes from a higher debt than equity level. The negative values of net assets from acquisitions shows the sale of a division of the company. The minimum value of common shareholders’ equity is a high negative number which means that the total debt of the company is higher than the total assets. The average percentage of employee turnover is 11.41% with a minimum of 0.06% turnover and a maximum of 92.86% turnover.
Now the control variables will be discussed. The board size, firm size, age of the firm,
shareholder rights, complexity of the firm, year fixed effects and industry fixed effects should be incorporated into the regressions as these variables are expected to have an effect on the quality of corporate governance and on gender-diverse boards. The log of total assets is used as a proxy for firm size. The shareholder rights is proxied by a score realized of the
companies’ improvement and information tools to develop appropriate shareholder rights principles. The shareholder rights variable has an average score of 45.07, a minimum of 29.70 and maximum of 100. Shareholder concentration is proxied by the percentage of shares held by all insiders and 5% owners. On average, 39.22% is held by this specific group with the minimum of 0.02% and a maximum of 90.53%. The firm complexity will be based on the equally weighted average of the firm size, the debt to common equity and the capital
expenditures to total assets. The industry fixed effects will be added using the NACE Rev.2 system which has 21 divisions. The explanation of the divisions can be found in Table A.2. The year fixed effects can be added using the year variable already available due to the panel
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dataset. The age of the firm is calculated by substracting the year of the firms’ incorporation with the specific year. The average age of a firm is about 39 years with a minimum of 0 and a maximum of 198 years. The negative observations will be dropped. The age of the firm and the industry are manually collected using Amadeus. The other variables are obtained from Datastream.
Table 2: Summary Statistics of mandated quota country firms
This table reports the summary statistics of various firm-level time-varying characteristics of the mandating quota country firms during the period 2004 until 2017 reporting the variable in column 1, the number of observations, the mean, the standard deviation and the minimum and maximum value of the variable in the columns in the mentioned sequence. All variables are defined in Table A.1. All variables are rounded to three digits except for the ratio of dividends per share to common equity due to the small numbers.
Variable Obs Mean Std. Dev. Min Max
Post 4.536 0.193 0.395 0 1
Audit Committee Independence 2.748 59.462 36.132 0 100
Audit Committee Non-Executives 2.883 97.576 8.447 0 100
Board Meeting Attendance Average 2.227 89.112 10.841 27 100
Board Size 3.309 13.329 4.854 1 44
Board Diversity 3.163 17.803 14.362 0 66.670
Experienced Board 2.171 6.234 3.061 0 22.920
Independent Board Members 2.943 40.189 29.700 0 100
Brands and Patents, gross 1.424 1877056 5055910 0 53600000
Capital Expenditures/Total Assets 3.822 5.178 7.632 0 209.38
Committee Meeting Attendance Average 1.401 93.512 7.287 0.470 100 Compensation Committee Independence 2.192 68.974 26.978 0 100 Compensation Committee Non-Executives 2.455 95.637 11.914 0 100 Development Costs, gross / Total Assets 877 0.046 0.065 0 0.497 Dividends per Share / Common Equity 3.720 0.00000296 0.0000993 -0.0000555 0.0052536 Net Assets from Acquisitions / Total Assets 3.653 0.016 0.053 -0.662 1.094
Nomination Committee Independence 2.372 54.067 36.100 0 100
Nomination Committee Non-executives 2.377 95.196 13.088 0 100
Number of Board Meetings 3.019 8.349 4.081 1 36
Research and Development costs / Total Assets 1.978 0.032 0.049 0 0.513
State Owned Enterprises 1.302 0.111 0.314 0 1
Total Debt/Common Equity 4.132 149.969 498.559 -9357.730 15441.380
Turnover of Employees 1.776 11.412 9.436 0.060 92.860
Non-executive Board Members value 3.116 90.636 12.624 0 100
Strictly Independent Board Members value 790 37.320 24.652 0 100
Women Employees 2.416 34.313 17.481 3.400 100
Women Managers 1.755 25.962 13.037 0 65.44
Shareholder Rights 3.320 45.072 22.231 29.700 100
Shareholder Concentration 1.622 39.221 29.319 0.020 90.530
Gender Balance directors in Country 4.536 0.087 0.035 0.0345 0.179
Age of the Firm 3.898 38.710 34.851 0 198
Industry 4.514 7.599 4.889 0 19
Firm Size 4.118 16.178 1.863 9.315 21.716
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The yearly averages of the quality of corporate governance variables are displayed in the Graphs A.13 separated by country. In this manner the effects on the quality of corporate governance following the quota or reporting requirement adoption per country are visualized to be able to better interpret these effects. Each country with either a mandated or target quota or reporting requirement has two graphs with the variables of the monitoring process and role model position on the left graph and of the corporate policies on the right graph. The red vertical line displays the time of the adoption of the gender equality rule of the specific country.
The adoption of the mandated quota of Austria was incorporated in 2017 and the adoption of the reporting requirement of Sweden was integrated in 2004 which results in no available data before or after the quota adoption to be able to relate the variables prior and after adoption.
The graphs of countries with mandated quotas will be discussed first. The left graphs indicate that Belgium, France and Norway observe a decrease of the percentage independent directors after the quota adoption, while Germany and Italy observe an increase of the
percentage independent directors. The percentage of females among employees and managers increases after the quota adoption in France although this percentage decreases in Belgium, Germany and Italy. For Norway, France, Germany and Italy the committee meeting
attendance average increases after quota adoption, for Belgium this average decreases. The board meeting attendance average increases in Belgium, France and Italy. The number of board meetings increases in France, while it decreases in Italy. The total debt to common equity decreases in Norway and France after the quota adoption, in Italy this ratio increases. The other corporate policy variables indicate no denoting differences.
The target quota countries Finland, the Netherlands and Poland show an increase in the percentage of independent directors, while Ireland shows a decrease of this percentage. The percentage of females among employees and managers increases in Finland, Ireland, the Netherlands and Poland. The board and committee meeting attendance average and the number of board meetings decreases in Ireland while these variables increase in Poland. The total debt to common equity increases in Finland and the Netherlands after the quota adoption, but decreases in Ireland. Poland observed a decrease in this ratio immediately after the quota adoption which is thereafter compensated with an increase. The turnover of
employees increases in the Netherlands and Poland.
The reporting requirement countries all react differently on the gender equality regulation. In Denmark, the board and committee meeting attendance average and the
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percentage females among employees and managers slightly decrease. The percentage independent directors first increases after the adoption, then decreases by 30% and thereafter increases again. The only corporate policy variable that changes is the total debt to common equity with a considerable decrease after the reporting requirement adoption. The only observable difference of the variables in the United Kingdom is a decrease in the total debt to common equity after the reporting requirement adoption in 2012. The percentage females among employees and managers and the turnover of employees of Luxembourg present an increase despite the observations starting in 2012. This origin of the availability of these variables could display the increased importance of gender equality in Luxembourg prior to the adoption of the reporting requirement.
Looking into the effects of the gender equality regulation separated by country, it can be concluded that every country has a different reaction to the gender equality regulations. The only consistent observations are the lack of denoting differences in the corporate policy variables despite the total debt to common equity and that the mandated quota countries present an increase in the board meeting attendance average, where the target quota countries display an increase in the percentage females among employees and managers and turnover of employees. These observations visualize the differences of the effect of the quotas on the quality of corporate governance per country. This indicates the importance to investigate the universal effect of a gender quota on the quality of corporate governance. The results of this investigation will be presented in the section 4.2 Empirical results and discussion.
25 4.2 Empirical results and discussion
First the empirical results of the univariate comparisons between male and female director characteristics will be discussed. Thereafter the results of the Two Stage Least Squares regressions will be analyzed to investigate the effect of gender-diverse boards following mandated quotas on different aspects of the quality of corporate governance. At last, the difference-in-difference analyses will be reviewed where the effect on the different measure of the quality of corporate governance will be compared using the differences of prior and post quota adoption and of the mandating or targeting quota.
Table 3 shows the univariate comparisons between male and female directors. Female directors are significantly younger at a 1% significance level, with an average age for male directors of about 56 and 51 for female directors. Female directors are also significantly less experienced; an average male director is 5.5 director years and female directors 4.3 years. This is consistent with the expectations that women are not expected in a top function due to the smaller supply of female directors caused by the gender self-schema. The level of
education does not differ significantly between male and female directors, shown by the p-value of 0.4473. It was expected, following the status characteristics theory, that female directors had a higher education to show their ability needed due to their minority role on the board. The results indicate that female directors do not have a significant higher education which could be attributed to the external pressures of gender balance on the board. Female directors do not have to give additional evidence of their ability anymore following this external pressure relating director gender equality. Female directors are significant more likely to be a committee member with a probability of 38.88% for female directors and 32.35% for male directors which is consistent with the expectations that a committee
membership is an additional source of monitoring which female directors desire. The number of committees of male and female directors does not differ significantly, which can be seen by the p-value of 0.4944. The number of audit committees directors hold does differ significantly by gender; female directors have significantly more audit committees than their male
counterparts. This is shown by the significant negative t-statistic of -3.5870 with a p-value of 0.0003. The number of nomination, compensation and corporate governance committees do not differ significantly between male and female directors. The finding of the only significant difference in the number of audit committees in favor of female directors shows the additional monitoring female directors demand again.
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The individual differences can be concluded with the findings that female directors are significantly younger, less experienced, more likely to be a committee member and have more audit committee memberships. These findings are all consistent with the expectations.
Table 3: Univariate comparisons of the individual differences
Comparison of director characteristics between female and male directors. This table reports summary statistics for director characteristics of female and male directors. The mean and standard deviation (in parentheses) for each variable are reported separately for the female and male directors in the first and second column separately, with the t-statistics and p-values (in parentheses) reported in the third column. All variables are defined in Table A.1 and rounded to four digits. * p < 0.1, ** p < 0.05, *** p < 0.01
Male directors Female directors T-statistic of the difference
Age 55.9437 50.7891 56.7920*** (9.7677) (9.4148) (0.0000) Experience 5.5714 4.3012 25.5531*** (5.4131) (4.4288) (0.0000) Education 1.3833 1.4011 -0.7599 (0.7860) (0.7742) (0.4473) Committee Member 0.3235 0.3888 -4.6468*** (0.4679) (0.4877) (0.0000) Number of Committees 1.1574 1.1894 -0.6834 (1.5686) (1.5507) (0.4944)
Number of Audit Committees 0.3538 0.4211 -3.5870***
(0.6192) (0.6893) (0.0003)
Number of Nomination Committees 0.2135 0.1932 1.3507
(0.5041) (0.4954) (0.1768)
Number of Compensation Committees 0.2324 0.2548 -1.4502
(0.5128) (0.5430) (0.1470)
Number of CG Committees 0.0262 0.0300 -0.7618
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Now the two stage least squares regressions will be discussed. The first stage regression is shown in the first column of Table 4 which tests the potential significant relationship of the instrumental variable on the endogenous independent variable. The instrumental variable coefficient is significant at a 1% level with a coefficient of 186.9417. This significance satisfies the relevance condition of the instrumental variable which is of high economic value. The coefficient can be interpreted as if the gender balance in the local director pool increases by 1%, the percentage gender balance on the board of the firm increases by 1.87%. The R2 of
0.438 shows that this regression explains 43.8% of the variation of the gender-diversity on the board. All control variables are added as well as the year and industry fixed effects. Only the control variables firm size and shareholder concentration have a significant effect at a 1% level and 10% level. The significant coefficient of firm size shows that if the log of the total assets increases by 1, the gender balance on the board increases by 0.63%. The significant coefficient of shareholder concentration can be interpreted as a negative relationship which was expected; an 1% increase in shareholder concentration decreases the gender balance on the board by 1.62%. These effects are not economically large.
The second stage regression on the number of board meetings is displayed in the second column. The main explanatory variable, the dependent variable estimate of the first stage regression using the instrumental variable, is positively significant at a 1% level with a coefficient of 0.3071. An increase in the gender balance on the board of 1% increases the number of board meetings with 0.3071. The economic relevance lies in this positive relationship between the gender-diversity on the board and the number of board meetings, because it is consistent with the expectation that gender-diverse board monitor additionally. This finding let us conclude that the effect of gender-diverse boards on the number of board meeting enhances the quality of corporate governance. All control variables and fixed effects are incorporated, with significant coefficients of the age of the firm, the shareholder
concentration and firm size. The age of the firm negatively affects the number of board meetings; when the firm is one year older, the number of board meeting decreases by 0.48. If the shareholder concentration increases by 1%, the number of board meetings decreases by 1.05. The firm size has a positive significant relationship with the number of board meetings; an increase of the log of total assets of 1 increases the number of board meetings by 0.2550. All these effects are not of sizable economic importance. The R2 of0.403 shows that this
