Gender Balancing Instruments Revisited:
Do Gender-Diverse Corporate Boards Lead
to Higher Firm Value?
University of Amsterdam, Amsterdam Business School
MSc. Business Economics – Track: Finance
Master Thesis
Abstract: This study analyzes the effect of board gender diversity on firm value by using the implementation of corporate gender quotas in Belgium, France, Italy, The Netherlands, Norway and Spain as an exogenous instrument. No significant relationship between board gender diversity and firm value is found over the period two years after implementation. Furthermore, no difference in effect of quota-implementation on firm value is found for different cultural perceptions of gender equality and between mandatory and voluntary quotas. Although no effect of gender diversity on firm value is found, this study does provide evidence that corporate gender quotas do at least reach their main goal: improvement of corporate gender diversity. Since no effect of quota-implementation on firm value is found, this study suggests that policymakers should motivate the implementation of gender quotas by ethical arguments, unlike the economic arguments such as improvement of firm value.
Student: Eline Brinkhuis
Student Number: 10750517
Supervisor: Florian Peters
Date: July 2015
2
STATEMENT OF ORIGINALITY
This document is written by Student Eline Brinkhuis 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 TABLE OF CONTENTS
I. Introduction ... 5
II. Background and Literature ... 8
A. Legislative Background in Europe ... 8
B. Theoretical Perspectives on Gender Diversity ... 10
Agency Theory ... 10
Resource Dependence Theory ... 11
Human Capital Theory ... 11
Social Psychology Theory ... 12
C. Theoretical Perspectives on Corporate Gender Quotas ... 12
Pro-Quota ... 13
Anti-Quota ... 13
D. Empirical Research ... 14
Diversity-Performance Research ... 14
Quota Research ... 16
III. Hypothesis Development ... 17
A. Board Gender Diversity ... 17
B. The Effect of Culture ... 17
C. Mandatory versus Voluntary Quotas ... 18
IV. Research Design ... 19
A. Data and Sample ... 19
B. Summary Statistics ... 20
C. Methodology ... 25
V. Results ... 29
A. Gender Diversity and Firm Value ... 29
B. The Effect of Culture ... 31
4
VI. Robustness Analyses ... 34
Controlling for Board Size and Log(Assets) ... 34
Count of women instead of % women ... 34
Placebo-Tests US ... 34
2002 as Pre-Quota Year ... 35
Quota-Year Norway 2003 instead of 2006... 35
VII. Conclusion and Discussion ... 35
References ... 40
Appendices ... 43
Appendix A: Overview of Gender Quotas in European Countries ... 43
Appendix B: Variables Description ... 45
Appendix C: Summary Statistics (Extended) ... 48
Appendix D: Percentage of Female Directors around Quota-Implementation ... 51
Appendix E: Female Representation in Pre-Quota and Pre-Pre-Quota Year ... 52
Appendix F: Pre-Quota Firm Characteristics ... 53
Appendix G: Pre-Quota Industry Characteristics ... 54
Appendix H: Robustness Checks – Controlling for Board Size and Log(Assets) ... 55
Appendix I: Robustness Checks – Count of women instead of % women ... 56
Appendix J: Robustness Checks – Placebo-Tests US ... 57
Appendix K: Robustness Checks – 2002 as Pre-Quota Year ... 58
5 I. INTRODUCTION
The lack of presence of women in corporate top positions is a frequently discussed and researched topic in both the world of business, politics and the academic literature. Although statistics show an increase in women in top positions, they also show the inequality is still persistent (Thomson Reuters, 2014). In response to this inequality between male and female executives, there is a growing regulatory pressure on firms worldwide to address this underrepresentation of women in top positions. Within Europe, a variety of instruments have been developed to promote gender balance within the corporate world (European Commission, 2011). These instruments vary from non-legislative instruments, to references within corporate governance codes, to mandated laws or so-called women quota.
Norway was the first country implementing a mandated quota requiring a minimum percentage of women to be represented within corporate boards. In 2003 a law was introduced requiring firms to have at least 40% representation of women on their boards of directors (Ahern and Dittmar, 2012; Nygaard, 2011). Following this Norwegian example, gender quotas have been proposed or adopted in several European countries. Currently, next to Norway, mandated quotas with severe non-compliance sanctions are implemented in Belgium (33%), France (40%), Germany (30%) and Italy (33%) (Appendix A). Other countries implemented quotas without formal sanctions, for instance The Netherlands (30%) and Spain (40%). As a third group, some countries do support equal gender representation within corporate boards, but these countries do not require a certain percentage and emphasize the concept of self-regulation (e.g. Sweden and United Kingdom). An important development in the gender quota discussion is the EU-legislation proposal of 2012, where the European Commission proposed to introduce EU-wide EU-legislation to require 40% of the non-executive directors within listed firms to be female (European Commission, 2012).
Thus, both in business, politics and in the academic literature, board diversity is a much debated topic. The concept of board diversity is best described by Van der Walt and Ingley (2003) as “board composition and the varied combination of attributes, characteristics and expertise contributed by individual board members in relation to board processes and decision making” (page 219). Different types of board diversity can be identified, such as age, gender, ethnicity, culture, religion, professional background etc. This study will limit board diversity to board gender diversity, measured as the percentage of female directors on a firm’s board of directors. The existence of both one-tier and two-tier board structures makes the term ‘board of directors’ a little confusing. Some countries, e.g. The Netherlands, use a two-tier board model, while others, e.g. Belgium, use one-tier board models. Within a two-tier model the executive board and the supervisory board are two separately functioning boards (Lückerath-Rovers, 2013). However, a one-tier model, where executive directors and non-executive directors are working together in one board
6 of directors, is internationally more common. Since this study analyzes multiple countries, one-tier and two-tier board models are mixed. To avoid confusion, this study adopts the definitions of the European Commission, implying that the ‘board of directors’ is considered the highest decision-making body in a company. In the case of a two-tier board structure, the highest decision-making body is often called the supervisory board. Within this study, the supervisory board of a two-tier system is thus called the ‘board of directors’ and is equivalent to the ‘board of directors’ of a one-tier system.
Arguments for equal representation of women in top-positions in the corporate world are varying. Next to the arguments of democratic legitimacy of decision-making and better utilization of the talent pool, the arguments of economic growth and improved performance are emphasized by policymakers (European Commission, 2011). By taking a financial perspective, the question remains whether having more gender-diverse boards indeed lead to higher firm value. More generally, the aim of this research is to provide an answer to the question whether more gender diversity will influence firm value. Existing theoretical perspectives, as well as current academic research on the relationship between board diversity and firm value do not provide a definitive and clear answer to this question. No single theory predicts the nature of the relationship between board gender diversity and firm value, but several theories, like the agency theory and the resource dependence theory, do provide insight into the issue. Moreover, the results of existing empirical research on gender diversity and firm value are mixed and evidence of a direct relationship between gender diversity on corporate boards and firm value remains elusive.
The limited understanding of board composition, and thus board gender diversity, may be explained by the endogenous nature of corporate boards, as indicated by Adams et al. (2010). This endogeneity problem makes it hard to distinguish which board characteristics affect firm value (Ahern and Dittmar, 2012). For example, in the context of board gender diversity it is difficult to prove whether gender diverse boards have higher firm value or whether highly valued firms simply can afford to attract more female directors. In line with this, Farrel and Hersch (2005) found that women tend to be employed on boards of better performing firms. They suggest that better performing firms are able to focus more on diversity goals or that a lack of supply of female directors allows women to self-select the firms they will work for as a director. While this endogeneity issue is addressed by several researchers (Chapple and Humphrey, 2014; Carter et al., 2010; Adams and Ferreira, 2009; Campbell and Mínguez-Vera, 2008), no unambiguous causal relationship is reported between gender diversity and firm value, suggesting that researchers may have failed to control for this endogeneity problem (Simpson et al., 2010).
To address the endogeneity issue related to board diversity, both Ahern and Dittmar (2012) and Matsa and Miller (2013) took a different approach than the earlier performed research on board gender diversity. By performing a difference-in-difference analysis both papers proved causal evidence on the impact of gender
7 quotas on firm value. Making use of the pre-quota cross-sectional variation in female representation to instrument for exogenous changes to corporate boards following the implementation of the Norwegian gender quota, Ahern and Dittmar (2012) reported a large decline in Tobin’s Q after the quota-implementation. By analyzing the Norwegian case as well, Matsa and Miller (2013) found that firms affected by the quota had reduced short-term profits amongst others.
In line with Ahern and Dittmar (2012) this study makes use of the exogenous nature of the implementation of gender quotas to investigate the relationship between firm performance and board gender diversity by exploiting a natural experiment in board structure. Implemented quotas requiring a specified percentage female directors in six European countries are analyzed, namely Belgium, France, Italy, The Netherlands, Norway and Spain. To estimate the effect of gender diversity on firm value, the pre-quota variation in female representation is used as an instrument. By making use of a two-stage instrumental variables regression, the first stage provides information on the direct effect of the quota-implementation on gender diversity, i.e. the effectiveness of the quota, at the same time. Additionally, by adding a double-interaction term to the analysis, this study analyzes the difference in effect of gender diversity on firm value between different cultural perceptions of gender equality and the difference in effect between mandatory implemented quotas, i.e. quotas which are accompanied by severe penalties on non-compliance, and voluntary implemented quotas which do not have any sanctions related to non-compliance.
In contrast to expectations, the results of the main analysis show no significant effect of gender diversity, as instrumented by the quota implementation, on firm value, measured by Tobin’s Q. However, the implementation of gender quotas appeared to positively influence gender diversity. Thus, it can be concluded that implemented gender quotas do at least reach their main goal: improvement of the gender board diversity. No significant difference in the effect of gender diversity on firm value is found for different perceptions of gender equality and no significant difference in this effect is found between mandatory and voluntary quotas. All results show to be robust to several performed robustness checks. Since no significant effect of gender diversity on Tobin’s Q is found in this study, the results of this study are inconsistent with the results found by Ahern and Dittmar (2012). Ahern and Dittmar (2012) reported a large decline in Tobin’s Q over the years following the quota-implementation in Norway. This negative effect of gender quota-implementation appeared not to exist in the multi-country setting of this study. This study is an important contribution to the existing literature on gender board diversity, mainly because this study is the first multi-country study analyzing the relationship between board gender diversity and firm value using a natural experiment. Carter et al. (2010) already suggested that, since diversity may potentially differ between countries, multi-country studies would increase the understanding of board
8 diversity. Furthermore, they suggested that natural experiments would greatly increase the understanding of the link between board composition and firm performance. This study is the first combining these two suggested directions of research.
Compared to Ahern and Dittmar (2012), who were the first using a natural experiment to investigate the effect of board composition on firm value by only focusing on Norwegian firms, the multi-country setting of this study increases the generalizability of the results. Moreover, the multi-country setting allows incorporating country and quota characteristics in the study as well. More specifically, this study contributes to the existing literature by incorporating the difference in effect on gender diversity and firm value for different cultural perceptions on gender equality and the difference in effect between mandatory and voluntary implemented quotas.
The remainder of this paper is structured as follows: Section II provides background-information on quotas and a literature review. The hypothesis development follows in Section III. Section IV introduces the data and explains the used methodology. Section V gives an overview of the results of this study and several performed robustness checks are presented in section VI. Section VII provides the conclusion and discussion of this study, followed by the references and appendices.
II. BACKGROUND AND LITERATURE A. Legislative Background in Europe
Within Europe there exists considerable variation regarding measures to promote board gender diversity (Isidro and Sobral, 2014). Some European countries enforced a minimum percentage of women on corporate boards by implementing mandatory quotas, other countries promote a certain percentage of women on boards by implementing voluntary quotas and a final group of countries did not implement measures, since they consider the representation of women on boards as a private business decision. Appendix A provides an overview of measures for female representation on corporate boards in fifteen European countries. The focus of this study will be on both mandatory and voluntary implemented women quotas applicable to listed firms, requiring a certain specified percentage of women.
Norway was the first European country implementing a women quota. In December 2003, the Norwegian Parliament adopted a first-of-its-kind law, requiring all public-limited firms to have at least 40% representation of women on their board of directors (non-executives) by July 2005 (Ahern and Dittmar, 2012). Until 2006 non-compliance did not had any sanctions. After this voluntary compliance failed, the 40% quota became mandatory from January 2006 onwards. By January 2008, firms that did not comply with the quota were forced to dissolve. The Norwegian example was followed by other European
9 countries shortly afterwards. In 2007, Spain introduced a law recommending public limited companies with 250 or more employees to have at least 40% of each gender being active on their board of directors (executives and non-executives) by 2015. In this case, there are no formal sanctions for non-compliant firms. The Spanish quota can thus be considered a voluntary quota. In 2011, the Netherlands also adopted legislation to promote gender diversity on corporate boards. Large Dutch companies have an obligation to strive to achieve to have 30% of each sex being active on both their supervisory and their executive board. The Dutch government opted for a ‘comply-or-explain’ approach; no formal sanctions are related to non-compliance, characterizing the Dutch quota as a voluntary quota as well.
In 2011, Belgium introduced a mandatory women quota requiring 33% of the directors (executives and non-executives) of listed companies and state-owned companies to be female. The year of final compliance is different for the different kind of companies: 2012 for state-owned companies, 2017 for listed companies and 2019 for listed SME’s. After this final date, appointments which do not meet the 33%-requirement will be considered void. Likewise, France adopted a mandatory quota in the same year. The French law sets a quota of 20% women to be achieved by 2014, and 40% by 2017. This mandatory quota is only applicable to non-executive directors in both listed and non-listed firms with 500 or more employees and revenues over €50 million. Appointments of directors which do not meet the quota-requirement will be invalid. In 2011, Italy adopted a comparable mandatory women quota. Listed companies and state-owned companies are required to have at least 33% of each gender being active on their board (executives and non-executives) by 2015. In the case of non-compliance, there is a progressive warning system which can ultimately lead to dissolution of the board. After a fierce debate, Germany followed to introduce a gender quota in 2015. The law required large companies to have at least 30% of the seats in their supervisory board filled by women by 2016. The quota can be considered a mandatory quota, since in case of non-compliance vacancies must be filled with women or the positions must be left empty.
Additionally to the earlier mentioned countries, Austria and Greece implemented gender quotas which are only applicable to state-owned companies. Other European countries, such as Denmark, Sweden, Finland, Portugal and the United Kingdom, did not specify an explicit percentage of women to be active within boards, but they do promote gender balance within corporate boards of listed companies by encouraging self-regulation and recommending equality on a more voluntary basis.
The discussion about equal gender representation on corporate boards revived after an EU-legislation proposal to promote gender balance on corporate boards. In November 2012, the European Commission proposed to introduce legislation to require 40% of the non-executive directors within listed companies to be female by 2020 (European Commission, 2012). Although a majority of the European countries already
10 introduced legislation to promote gender balance (Appendix A), the proposal resulted in a fierce discussion between advocates and opponents of gender quotas.
B. Theoretical Perspectives on Gender Diversity
Arguments in favor of greater gender diversity within corporate boards can generally be split into two groups: ethical arguments and economic arguments (Campbell and Mínguez-Vera, 2008; Isidro and Sobral, 2014; Fairfax, 2011). The ethical stream of arguments is based on the idea of equal opportunity and equal representation of individuals in society (Isidro and Sobral, 2014). From an ethical point of view, it may be argued that it is immoral for women to be excluded from corporate boards on the ground of gender and that firms should strive to have more women present on their boards to achieve a more equitable outcome for society (Campbell and Mínguez-Vera, 2008). The second stream of arguments emphasizes the possible economic benefits of greater gender diversity. The idea is that discrimination based on gender is economically suboptimal rather than immoral (Isidro and Sobral, 2014). Basically, the two critical functions of monitoring and advising the management have been assigned to the board of directors (Carter et al, 2010; Adams et al., 2010). In general, it is asserted that the way the board of directors performs these functions is affected by the composition of the boards (Carter et al, 2010). Following this reasoning, board gender diversity may be linked to firm performance, via board composition. Although no single theory predicts the nature of the relationship between board gender diversity and firm value, several theories from different scientific areas provide insight into the issue (Ntim, 2015; Isidro and Sobral, 2014, Carter et al., 2010; Terjesen et al., 2009).
Agency Theory
The first theory, often mentioned to describe the relationship between board diversity and financial performance, is the agency theory. Agency theory describes the relationship between a principal (the shareholder) and the agent of the principal (the directors and managers). The essence of the agency theory is the separation between ownership and control in modern firms (Isidro and Sobral, 2014), creating a conflict of interest between the shareholders of the firm and the directors and managers. In the agency theory, it is commonly assumed that outside directors will act independently from the inside directors of the firm. Outside directors will therefore act as better monitors for the shareholders’ interest (Terjesen et al., 2009). Agency theory predicts that more diverse corporate boards will be more independent boards, since directors with a different background might ask questions that would not come from the directors with the more traditional background (Carter et al., 2003). The analysis by Adams and Ferreira (2009) supports this relationship by showing that female directors have a similar impact as the independent directors described in governance theory. The common line of reasoning is that, in the case of a more
11 independent board, executive monitoring by the agents will improve, which will ultimately lead to enhanced firm value (Ntim, 2015). In contrast, Carter et al. (2003) assert that more diversity will not necessarily result in more effective monitoring, because diverse directors may be marginalized. Thus, agency theory does not provide a clear link between the board gender diversity and firm performance, but at the same time agency theory does not exclude the possibility that board gender diversity is financially beneficial.
Resource Dependence Theory
Another theory often applied in the diversity literature is the resource dependence theory. The resource dependence theory is based on the idea that firms are operating in an open system in which they need to exchange and acquire certain resources in order to survive. This is creating a dependency between the firm and the external environment (Terjesen et al., 2009). Resource dependence theory assigns a critical role to the board of directors by being an essential link between the company and its environment and by facilitating access to the external resources which are vital for the success of the firm (Isidro and Sobral, 2014; Lückerath-Rovers, 2013). By using the board of directors as a linking mechanism, the following benefits may be provided to the firm: (a) the provision of resources, such as information and expertise, (b) the creation of communication channels, (c) the obtaining of support from important actors in the external environment and (d) the creation of legitimacy for the firm in the external environment (Pfeffer and Salancvik, 1978). According to the resource dependence theory, diverse boards bring more resources to the firm, including skills, business contacts, prestige and legitimacy, which will result in better firm performance and higher firm value (Ntim, 2015; Carter et al., 2010, Shrader et al., 1997). Additionally, by matching the diversity of the board of directors to the diversity of a firm’s stakeholders, greater board gender diversity may result in a better understanding of the marketplace (Campbell and Mínguez-Vera, 2008), and an improvement in opportunities, reputation and firm value (Ntim, 2015).
Human Capital Theory
Thirdly, human capital theory may be applied to describe the relationship between gender board diversity and firm performance. Human capital theory examines the role of an individual’s stock of education, skills and experience in improving the individual’s capabilities, which may benefit the organization (Isidro and Sobral, 2014; Carter et al., 2010; Terjesen et al., 2009). Board diversity will thus result in many directors having unique human capital (Carter et al., 2010). It is often claimed that women do not have the adequate human capital to be a director (Terjesen et al., 2009). However, empirical evidence shows that men and women are equally qualified to function as a director, and that women bring a valuable pool of human capital to the board (Isidro and Sobral, 2014). Human capital theory predicts that firm performance and
12 firm value are positively affected by board gender diversity, as a result of the diverse and unique capital each individual brings into the board (Isidro and Sobral, 2014).
Social Psychology Theory
Finally, the social psychology theory describes the diversity-performance relationship by emphasizing the role of minority groups within corporate boards. Social psychology theory acknowledges that the status and impact of minority groups is depending on the social context and the group dynamics (Isidro and Sobral, 2014). According to the social psychology theory the relationship between board gender diversity and firm value may be both positive and negative. On the one hand, some empirical evidence shows that board members from a minority group stimulate divergent thinking and motivate other directors to consider a wider range of solutions within decision-making (Isidro and Sobral, 2014; Westphal and Milton, 2000). Board gender diversity may therefore result in more creative, more innovative and more qualitative decision-making and enhanced problem-solving within boards (Ntim, 2015; Wellalage and Locke, 2013; Campbell and Mínguez-Vera, 2008). In contrast, it is often argued that board gender diversity makes decision-making more time consuming and less effective, since greater gender diversity generates more diverse opinions and critical thinking (Isidro and Sobral, 2015; Campbell and Mínguez-Vera, 2008). Since diverse directors will all bring their individual and constituencies’ interest and commitments to the board, greater board gender diversity may lead to a greater potential for conflicts within the board (Ntim, 2015; Fitzsimmons, 2012) and lower social cohesion between groups (Carter et al., 2010). Additionally, Westphal and Milton (2000) argue that the social barriers within a group reduce the probability that minority viewpoints will influence the group decisions. This observation is related to the concept of tokenism, initially coined by Kanter (1977). Tokens are considered to represent an entire demographic group (in this case: women) and are seen as stereotypes by the dominant group (here: men) (Lückerath-Rovers, 2013). Since female directors are frequently chosen because of tokenism, their impact is likely to be minimal, as male directors may not consider the ideas of their female counterparts (Wellalage and Locke, 2013; Fitzsimmons, 2012). Thus, the same holds as in the agency theory, namely the observation that a fresh perspective may not necessarily result in more effective monitoring, since female contributions to the board may be marginalized (Ntim, 2015; Campbell and Mínguez-Vera, 2008). C. Theoretical Perspectives on Corporate Gender Quotas
Related to the different theories predicting the relationship between board gender diversity and firm value, are the diverse assertions on gender quotas. First question to ask is whether implementation of corporate gender quotas indeed results in an increase in gender diversity on corporate boards. Based on earlier research, it may be assumed that implementing a gender quota indeed raises the amount of women being
13 active on corporate boards (Ahern and Dittmar, 2012; Nygaard, 2011; Pande and Ford, 2011). For example in the Norwegian case, Ahern and Dittmar (2012) show a sharp increase in the representation of women directors in Norwegian public-limited firms after the implementation of the Norwegian gender quota. This increase persists both for the voluntary compliance period (2003 to 2005) as for the mandatory compliance period (2006 to 2008). Nevertheless, the increase is sharper after the mandatory enforcement of the quota. Though, Pande and Ford (2011) argue that governments can only increase the representation of women on corporate boards, if they demonstrate willingness to impose penalties for non-compliance with the implemented quota. Based on this result, it may be expected that implementation of a mandatory quota will result in a higher percentage of female director. Currently, no evidence is provided in the current academic literature regarding the implementation of voluntary quotas.
While we may expect a positive link between (mandatory) gender quotas and female representation on corporate boards, the relationship between gender quotas and firm value is more tenuous. Even when implementation of a gender quota appears to raise gender diversity on boards in every context, the effect of quota implementation on firm outcomes remains elusive since the above mentioned theoretical theories on the diversity-performance relationship do not provide an unambiguous nature of the relationship. Moreover, there exists no theoretical consensus regarding the nature of the direct relationship between gender quotas and firm outcomes.
Pro-Quota
On the one hand, the European Commission and several national governments are promoting the corporate gender quotas by emphasizing the benefits of their implementation. Next to the arguments of democratic legitimacy of decision-making and a better utilization of the talent pool, the arguments of economic growth and improved performance are often referred to by policymakers (European Commission, 2011). Ahern and Dittmar (2012) propose the “captured boards” hypothesis of Bebchuk and Fried (2005) to argue that quota implementation may reduce the influence of a CEO over the board. Less CEO influence will reduce agency costs, which will eventually lead to a higher firm value. Another frequently heard argument in favor of gender quotas is that quotas might reduce discrimination, change attitudes and help overcome any prejudices, which will result in more efficiency (Bertrand et al., 2014; Pande and Ford, 2011).
Anti-Quota
On the other hand, Nygaard (2011) and Ahern and Dittmar (2012) argue that, since firms will always compose their boards optimally to maximize firm value, any regulatory imposed constraint on board composition, such as a gender quota, can only reduce firm value. Likewise, Adams and Ferreira (2009)
14 expect a decrease in value when gender quotas are enforced in firms with strong governance, since within these kinds of firms greater gender diversity could lead to over-monitoring. Additionally, Pande and Ford (2011) argue that the implementation of gender quotas may result in underperformance via the lack of experience of female directors.
D. Empirical Research
Diversity-Performance Research
Like the predictions on the diversity-performance relationship made by the above mentioned theoretical theories, existing empirical research does not provide a clear relationship. The results of the performed academic research are mixed, although more positive relationships on the relationship between gender diversity and firm financial performance are found in the more recent studies (Terjensen et al., 2009). Shrader et al. (1997) were the first who assessed the direct relationship between board gender diversity and financial performance. For their sample of US firms in 1992 they found no significant relationship between the percentage of women on the board and firm financial performance, measured as ROE, ROA, ROI and ROS. Likewise, Chapple and Humphrey (2014) did not find evidence of an association between board gender diversity and performance for their sample of Australian firms for the period 2004-2011. Carter et al. (2003), however, found a positive relationship between gender-diverse boards and firm value (Tobin’s Q) using a sample consisting of US firms in 1997. Erhardt et al. (2003) confirmed this positive relationship between demographic board diversity, in terms of ethnic and gender representation on boards, and financial performance data, measured as ROA and ROI, for the years 1993 and 1998 for their sample consisting of large US companies. For a sample of Spanish listed firms for the period 1995 to 2000, Campbell and Mínguez-Vera (2008) found that the presence of women on the board of directors in itself did not affect firm value. However, they did indicate a positive relationship between gender diversity (the percentage of women) and firm performance (Tobin’s Q), implying that focusing on the balance between men and women within corporate boards is more important than simply the presence of women on boards. For a sample of Dutch companies, Lückerath-Rovers (2011) showed that firms having women on their boards perform better than firms having no women on their boards, in terms of ROE. However, since only correlations are presented, this study does not suggest a causal relationship exists.
In contrast, Adams and Ferreira (2009) reported a negative relationship between gender diversity and performance (Tobin’s Q) within their US sample for the period 1996 to 2003. Initially, they found a positive correlation between gender diversity and both firm value and operating performance. However, this relationship appeared to be negative once reasonable procedures to tackle omitted variables and
15 reverse causality problems were applied, indicating the importance of addressing the potential endogeneity issue associated with gender diversity within corporate boards. The existence of endogeneity within the diversity-performance relationship was also revealed by the results of Carter et al. (2010), for their sample of US firms for the period 1998-2002. At first instance, their fixed effect regression analysis indicated a positive and significant relationship between the number of women active on corporate boards and the ROA. No relationship, neither positive nor negative, was initially found between the number of female board members and Tobin’s Q, as a measure for financial performance. However, after applying a Hausman test, these fixed effect regressions appeared to suffer from endogeneity. To address this endogeneity issue, a 3SLS regression analysis was applied, resulting in no statistically significant relationships between board gender diversity and any measure of firm performance. Since no (positive) relationships between gender diversity and firm performance are found in both studies, the evidence provides no support for quota-based policy initiatives by governments. The researchers of both studies therefore argue that the enforcement of quotas for female representation on boards must be motivated by reasons other than improvements in firm performance (Carter et al., 2010; Adams and Ferreira, 2009). Thus, empirical evidence of a direct relationship between the presence of women on boards and firm financial performance remains elusive. Results are mixed and not directly comparable as a consequence of differences in samples and statistical methodologies (Simpson et al., 2010). An important issue related to the board diversity research is concerning endogeneity, as indicated by the results of Adams and Ferreira (2009) and Carter et al. (2010). In line with these empirical results, Adams et al. (2010) suggest that board composition, and thus board diversity, is endogenous because economic actors make the decisions that create the structure of the board to solve the governance problems the firms encounters. Additionally, strategic considerations may result in otherwise similar firms adopting different compositions of their board and other governance structures (Adams et al., 2010). Next to Adams and Ferreira (2009) and Carter et al. (2010), who applied an instrumental variables method and a 3SLS regression analysis respectively, other researchers recognized the potential endogeneity issue as well, all addressing the issue in a different manner. Campbell and Mínguez-Vera (2008) applied a 2SLS regression, just like Carter et al. (2003). Chapple and Humphrey (2014) used a portfolio approach to examine the relationship; specifically they constructed portfolios of firms with gender diverse boards and compared their returns with return of portfolios of firms with all-male boards. They argue that by forming the portfolios this way, firm-specific characteristics are averaged out, eliminating the heterogeneity issue and reducing the omitted variables problem. The difference in existing results concerning the diversity-performance relationship may thus be explained by a failure of the researchers to control for the endogeneity issue and/or the fact that the tested relationship may have been heterogeneous across firms (Simpson et al., 2010; Jurkus et al., 2011).
16 Quota Research
Even though Carter et al. (2010) and Adams and Ferreira (2009) claim that implementation of gender quotas should be based on criteria other than improved financial performance of firms, there exist two empirical papers presenting causal evidence on the impact of gender quotas on firm value.
First, Ahern and Dittmar (2012) present evidence on the relationship between firm value and board characteristics. They assessed the aforementioned endogeneity issue by exploiting the Norwegian quota-case. Ahern and Dittmar (2012) made use of the natural experiment which was created by the unprecedented exogenous change to corporate boards in Norway; the implementation of the gender quota. In line with Stevenson (2010), the variation in female board representation across firms before the implementation of the gender quota was used as an instrument to capture exogenous variation in mandated changes in the proportion of women on boards over time. They argue that “Since all public limited firms were required to meet a quota of at least 40% female directors, those firms that had a greater proportion of female directors prior to the quota faced a smaller constraint than the firms with fewer female director” (Ahern and Dittmar, 2012; page 141). For their panel of 248 publicly listed Norwegian firms, from the period 2001 to 2009, Ahern and Dittmar (2012) found that the enforcement of the Norwegian quota resulted in a decline in Tobin’s Q, as a measure of firm value. Their result provides a more long-run view of the impact of the quota on firm value. Additionally, to capture the immediate stock price reaction, an event-study approach was performed. A significantly different stock price reaction to the announcement of the gender quota was found for those firms with at least one female director before the announcement of the quota (-0.02%) compared to those firms with no female directors before the announcement of the quota (-3.54%). Ahern and Dittmar support their results with their stated hypothesis that, generally, boards are chosen to maximize a firm’s value. The implementation of a gender quota means a severe constraint on the choice of directors, which in turn leads to an economically large decline in firm value.
Second, Matsa and Miller (2013) also studied the Norwegian quota-case. They used difference-in-difference and triple-difference-in-differences comparisons over the years 2003 through 2009, to investigate the causal effect of the implemented quota. Matsa and Miller defined their treatment group as publicly listed Norwegian firms, affected by the quota. The control group was constructed of firms from Scandinavian countries other than Norway and non-listed Norwegian firms. They found that firms affected by the gender quota undertake fewer workforce reductions than the comparison firms, that affected firms have increasing relative labor costs and employment levels and that affected firms face reduced short-term profits.
17 III. HYPOTHESIS DEVELOPMENT
Board Gender Diversity
In summary, the interdisciplinary set of theoretical theories described provides a reliable indication that there is link between board gender diversity and firm value. However, the nature of this relationship remains inconclusive. Even the performed empirical research does not provide consistent evidence on the relationship. Since no direction of the relationship can thus be identified beforehand, the following non-directional hypothesis is stated:
Hypothesis 1: Corporate board gender diversity is related to firm value The Effect of Culture
Stulz and Williamson (2003) acknowledge that culture can affect finance through at least three channels. First, the culture within a country heavily determines the predominantly values in a country. Secondly, culture shapes institutions and thirdly, culture will affect how resources in the economy are allocated. Mainly because the shared values in a country depend on the national culture, the impact of enforcing gender quotas may differ between countries. Matsa and Miller (2013) already suggested that the economic, social and cultural context influence the impact of any particular quota. Furthermore, Matsa and Miller (2013) emphasized that the effects of gender quotas on corporate strategy may be larger in countries having more traditional gender roles or less public commitment to gender equality.
In Culture’s Consequence, Hofstede (1980) collected empirical evidence of cultural differences between 40 modern countries. Based on this evidence, he constructed four ‘cultural dimensions’, including the Masculinity/Femininity dimension. Later, the number of countries studied was increased to 50 and a fifth dimension (long/short term orientation) was added (Hofstede, 1991). The Masculinity/Femininity dimension concerns the emotional roles between genders. Hofstede defined Masculinity as follows: “Masculinity stands for a society in which social gender roles are clearly distinct: men are supposed to be assertive, tough and focused on material success; women are supposed to be more modest, tender, and concerned with the quality of life” (Hofstede, 2001; page 297). Conversely, Femininity is defined as follows: “Femininity stands for a society in which social gender roles overlap: both men and women are supposed to be modest, tender and concerned with the quality of life” (Hofstede, 2001; page 297). Based on these definitions, Masculinity will be associated with less gender equality and less women being active on corporate boards. In terms of Matsa and Miller (2013), masculine countries can be considered having more traditional gender roles.
18 Since this research is analyzing gender quotas in six European countries, differences in the effects of quota implementation may be expected. More specifically, it may be expected that countries having more traditional gender roles, i.e. more masculine countries in terms of Hofstede, will react differently to quota implementation than the more feminine countries, and thus a different effect on firm value may be expected. This expectation leads to the following hypothesis:
Hypothesis 2: The effect of corporate board gender diversity on firm value is different for more masculine countries than for more feminine countries
Mandatory versus Voluntary Quotas
Although it is earlier assumed that implementing a gender quota indeed will increase the representation of women on boards, this relationship is not obvious from performed empirical research. In the Norwegian case, Ahern and Dittmar (2012) showed a substantial increase in female representation on boards after the quota implementation. Importantly, from 2006 the Norwegian quota was accompanied by severe penalties for non-compliance, characterizing the Norwegian quota as a mandatory quota. Imposing severe penalties on non-compliance may lead to more firms complying with the quota, which will result in an increase in overall gender diversity. However, this line of reasoning may not apply in the case of so-called voluntary quotas, which do not specify penalties for non-compliance, since in this case there is less incentive for firms to comply. In the same vein, Ntim (2015) questions whether a voluntary compliance regime will be effective in achieving board gender diversity. Since Ahern and Dittmar (2012) show a difference in extent of growth in the percentage of female directors for the voluntary compliance period (2003-2005) than for the mandatory compliance period (from 2006 onwards), a difference in effect may be expected between mandatory and voluntary quotas. This study will therefore make a distinction between the two forms. First, the direct effect of the implementation of the quota on the corporate board gender diversity will be analyzed for both types together. This will give an indication of the relevance of the quota-implementation as an instrument for board gender diversity as well. Later, the difference in the effect of both quota-types on firm value will be tested. Based on the results of Ahern and Dittmar (2012), the effect of mandatory quotas on gender diversity is expected to be larger. However, since the nature of the relationship between diversity and performance is still unclear, no prediction can be made about the direction of the difference. The stated expectations result in the following hypotheses:
Hypothesis 3a: The implementation of a corporate gender quota will positively influence board gender diversity
19 Hypothesis 3b: The effect of corporate board gender diversity on firm value is different for mandatory quotas and voluntary quotas
IV. RESEARCH DESIGN A. Data and Sample
This study focuses on gender quotas, implemented in European countries, which are applicable to listed firms and are requiring a certain specified percentage of female directors. Quotas applied to state-owned companies and quotas without a specified required percentage are disregarded. Following the European quota overview (Appendix A), only seven countries meet this set criterion: Belgium, France, Germany, Italy, The Netherlands, Norway and Spain. Since the German quota is enforced very recently (2015), nothing can be said on the (longer-term) impact of this quota after implementation. Germany is therefore not considered within this study. Table 1 provides a short overview of the six countries incorporated within this study, including the quota characteristics and the country characteristics.
Table 1 – Country and Quota Characteristics
Country Quota Percentage Quota-Year Mandatory/ Voluntary Quota Hofstede Masculinity/ Femininity Index Belgium 33% 2011 Mandatory 54 France 40% 2011 Mandatory 43 Italy 33% 2011 Mandatory 70
The Netherlands 30% 2011 Voluntary 14
Norway 40% 2006 Mandatory 8
Spain 40% 2007 Voluntary 42
For the six countries, data regarding the board of directors is collected from the ASSET4 ESG Database via Datastream. The ASSET4 ESG Database provides data for a total of 272 companies in Belgium, France, Germany, Italy, The Netherlands, Norway and Spain, starting from the year 2002. Based on the ISIN-codes of these 272 companies, the dataset is supplemented with an industry classification and with accounting data for the years 2002-2014. The accounting data and industry classification are collected from the Worldscope Database via Datastream. Given the coverage of the ASSET4 ESG Database, the initial sample consisted of 3536 firm-year observations over the years 2002 to 2014 for 272 unique firms. All financial variables are winsorized at the 1 percent tails, which is commonly done in other academic literature when working with accounting data (Matsa and Miller, 2013).
In line with earlier research on governance and firm value, a firm’s yearly Tobin’s Q is computed to measure firm value. In line with Ahern and Dittmar (2012) and Adams and Ferreira (2009) Tobin’s Q is
20 calculated as the firm’s market value divided by the firm’s book value. A firm’s market value is calculated as the total book value of the assets minus the total book value of the equity plus the total market value of the equity. Tobin’s Q provides an indication of the wealth position of the major providers of funds to the firm: shareholders and creditors (Carter et al., 2010). Tobin’s Q is considered to be a better measure of firm value then accounting measures for two reasons. First, it is robust to major accounting changes (Ahern and Dittmar, 2012). Second, Tobin’s Q focuses on the market’s expectations of future performance rather than on historical events and is thus a good proxy for competitive advantage (Campbell and Mínguez-Vera, 2008).
To be able to compare the pre-quota variation in female board representation across the six countries, it is first calculated to what extent each firm felt short of the quota the year before quota-implementation by subtracting the percentage female directors in the year before quota implementation from the required quota-percentage. This pre-quota year is the starting point of the analysis. For each firm, the percentage of female directors in the subsequent years is analyzed. Given the limited data regarding female representation in 2014 in the dataset, female board representation is only analyzed up to 2013. Since the majority of the analyzed quotas are implemented in 2011, the time horizon for each firm is thus limited to a period of three years; the quota-year and two years after. For Belgium, France, Italy and The Netherlands this results in the period 2011-2013, for Norway the period 2006-2008 and for Spain the period 2007-2009. The final sample of this study consists of 816 firm-year observations over a three-year time period for 272 unique companies. Appendix B provides a description of all variables incorporated in this study.
B. Summary Statistics
Table 2 provides the average values of the percentage of female directors on a board, the board size and Tobin’s Q for the years 2002 to 2014 for the total sample and the six countries separately. Since all firms are kept in sample even when a year-observation on a particular variable is missing, the number of observations varies between the three variables and the years. Information on the number of observations for each variable and year are in Appendix C. Resulting from the lack of data availability on board of directors variables in 2014, the average of percentage female directors and the average board size in 2014 are less accurate for all countries. For completeness the 2014 averages are represented in table 2, but the 2014-data will be disregarded in the following sections of the analysis.
21 Table 2 – Summary Statistics by Country and Year
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Total Female (%) 4.56 4.68 5.68 7.03 8.19 9.11 9.61 10.61 13.49 16.38 19.14 21.96 19.70 Board Size 12.08 12.77 11.95 12.30 12.43 12.54 12.56 12.63 12.92 12.78 12.56 12.30 9.96 Tobin’s Q 1.36 1.46 1.57 1.69 1.79 1.71 1.28 1.40 1.40 1.27 1.36 1.47 1.45 Belgium Female (%) 0.65 1.29 2.93 4.11 4.49 6.68 7.43 8.21 10.69 12.50 14.98 17.50 17.04 Board Size 12.93 12.79 11.56 12.24 12.24 12.45 12.25 12.24 12.92 13 11.96 12.08 8.33 Tobin’s Q 1.20 1.30 1.51 1.49 1.54 1.51 1.17 1.28 1.35 1.22 1.32 1.25 1.24 France Female (%) 4.05 4.57 5.50 7.61 7.23 7.43 8.49 9.42 14.64 19.47 23.52 26.90 29.60 Board Size 12.76 13.09 12.19 12.76 12.84 12.51 12.79 12.97 13.48 13.41 13.33 13.39 11.57 Tobin’s Q 1.35 1.44 1.54 1.58 1.67 1.63 1.27 1.36 1.41 1.30 1.38 1.48 1.46 Italy Female (%) 0 0.48 1.00 1.25 2.10 3.21 3.32 3.78 5.83 6.81 11.60 17.50 15 Board Size 13.24 15.65 15 15.23 15.26 15.29 14.52 15.11 15.70 15.53 15.14 14 14.5 Tobin’s Q 1.30 1.34 1.38 1.35 1.43 1.33 1.08 1.17 1.16 1.08 1.14 1.24 1.18 Netherlands Female (%) 5.35 4.58 5.28 8.81 11.17 11.86 12.02 12.64 12.56 15.75 17.06 18.27 15.77 Board Size 8.4 8.07 7.75 7.90 8.36 8.38 8.08 8.11 7.79 7.59 7.82 7.68 7.25 Tobin’s Q 1.48 1.57 1.63 1.94 1.98 1.82 1.47 1.58 1.55 1.35 1.47 1.63 1.79 Norway Female (%) 20.62 20.74 22.40 22.44 29.29 31.69 31.41 32.14 34.17 37.83 36.47 36.69 - Board Size 7.5 8.33 7.59 7.45 9 10.52 10.71 9.35 8.45 8.27 8.23 8.47 - Tobin’s Q 1.14 1.30 1.52 1.90 2.03 2.00 1.07 1.35 1.44 1.24 1.37 1.45 1.31 Spain Female (%) 2.72 2.47 2.98 3.25 3.87 5.69 7.06 9.54 10.76 12.02 13.28 14.79 14.85 Board Size 14.61 15.11 13.93 13.97 13.47 13.84 14.05 14.10 14.60 14.41 14.18 13.78 14.25 Tobin’s Q 1.54 1.71 1.89 2.19 2.39 2.19 1.56 1.70 1.55 1.40 1.46 1.70 1.64
Notes: This table represents the average percentage of female directors on a board, the average board size and the
average Tobin’s Q for each of the years from 2002 to 2014 for the total sample and Belgium, France, Italy, The Netherlands, Norway and Spain separately. The number of observations is varying between the three variables and the years, since firms are kept in the sample even when a year-observation on one of the variables is missing. The number of observations for each variable and year are in Appendix C. Because of these missing observations, the 2014 average for Female(%) and Board Size is less accurate, since the dataset got many missing observations in 2014.
For the total sample, an increase in female representation on corporate boards can be observed for the period from 2002 to 2013 (see also figure 1). Female representation started with 4.56% in 2002 and more than quadrupled to 21.96% at the end of 2013 for the total sample. From figure 1 it can be seen that female representation started to increase sharper from 2009 onwards. In line with this observation for the total
22 sample, every observed country shows a comparable increase in percentage of female directors over the period from 2002 to 2013. The highest percentage of female directors is found in Norway, with 36.69% of the board seats filled by women in 2013. Remarkable is the very low representation of women in Italy in the beginning of the observed period, where even a zero percentage of women is observed in 2002. For the total sample, the board size remained relatively constant during the observed period, with the lowest average of 11.95 members in 2004 and the highest average of 12.92 in 2010. However, board sizes are varying between the six countries, with the Netherlands and Norway presenting the smallest boards and Italy and Spain presenting the largest boards. Finally, the average Tobin’s Q reported ranges from a low of 1.07 (Norway, 2008) to a high of 2.39 (Spain, 2006). The mean of the total sample over the period 2002-2014 is 1.48. On average, the higher Tobin’s Q’s are observed before the global recession. In line with this, a decline in Tobin’s Q is observed for every country in 2008.
Figure 1- Average Percentage of Female Directors from 2002 to 2013
Figure 2 shows the average percentage of female directors on corporate boards in the years around the implementation. In the period two years before implementation to two years after quota-implementation the average percentage of female directors increases steadily for the total sample. Remarkably, for the total sample no increase in growth can be identified around the quota-implementation.
23 Figure 2- Average Percentage of Female Directors in the Years around Quota-Implementation Notes: The average percentage of female directors is presented separately for the total sample and for the sample excluding France, since the France-data biases the average of the total sample. Year t=0 represents the year of quota-implementation, which is different between the six countries observed. Year t=-2 represents the year two years prior to quota-implementation, year t=-1 represents the pre-quota year and year t=1 and t=2 the first and second year after implementation of the quota respectively. Percentages of female directors are observed at the end of each year.
When analyzing the development of corporate female representation in the years around quota-implementation for each country separately, an increase in the growth of the average percentage of female directors can be identified for Norway, The Netherlands, Italy and Spain (figure 3). Norway and The Netherlands exhibit a constant percentage of female directors before quota-implementation, followed by a steep increase in female directors in the quota-year, indicating that a substantial part of the firms may have increased their percentage of female directors directly once the quota was implemented. After the quota-year, the increase in the percentage of female directors continues but diminishes. A similar but flatter pattern can be identified for Spain. In Italy, female representation appeared to have grown already before quota-implementation, but started to increase steeper in the two years after quota-implementation. Presumably a delay in effect has played a part: firms reacted to the quota by increasing the amount of women on their boards one year after quota-implementation. France and Belgium do not exhibit an increase in the growth of the percentage of female directors around quota-implementation. Both countries appeared to have experienced a steady growth in female representation in the years around quota-implementation, as can be seen from figure 3. Appendix D provides a closer look at the development of female representation in France and Belgium. In both countries a relatively constant average percentage of
0 5 10 15 20 25 Av e ra g e Pe rc e n ta g e o f F e m a le D ire c to rs t=-2 t=-1 t=0 t=1 t=2
Years around Quota-Implementation All Countries
24 female directors is observed between the end of the third and the end of the second year prior to quota-implementation. In France, an increase in the growth of female representation can be identified from the second year before quota-implementation onwards. It may be that the French quota was already expected to be implemented by firms and therefore firms already anticipate on the quota before the quota was actually implemented. Anticipation may also have played a role in Belgium: appendix D shows an solid increase in female representation in Belgium in the first year before quota-implementation and in the years after quota-implementation, but a reduced growth rate is observed in the quota-year itself. It may be that firms already expected the quota before the quota was effective, but were reluctant to increase their number of female directors in the quota-year itself since there may have been uncertainties regarding the details of the quota, for example the exact quota rate. Taking into account these possible anticipation-biases, female representation in the pre-quota and pre-pre-quota year are compared later in this study to ensure that board composition was not impacted before quota-implementation.
Figure 3- Average Percentage of Female Directors in the Years around Quota-Implementation by Country Notes: The average percentage of female directors is presented separately for all six countries. Year t=0 represents the year of quota-implementation, which is different between the six countries observed. Year t=-2 represents the year two years prior to quota-implementation, year t=-1 represents the pre-quota year and year t=1 and t=2 the first and second year after implementation of the quota respectively.Percentages of female directors are observed at the end of each year.
0 5 10 15 20 25 30 35 40 Av e ra g e Pe rc e n ta g e o f F e m a le D ire c to rs t=-2 t=-1 t=0 t=1 t=2
Years around Quota-Implementation Belgium France Italy The Netherlands Norway Spain
25 Furthermore, Appendix D reveals that the average percentage of female directors for the total sample is heavily dependent on incorporation of the French average percentage of female directors. This can be explained by the high amount of French observations, being more than one third of the total sample. The reported steady increase in France in the period from two years prior to two years after implementation thus heavily biases the development of the average percentage female directors of the total sample. Therefore, the average excluding France is presented in figure 2 as well. This average exhibits an increase in the growth of female representation from the quota-year onwards. This pattern is in line with expectations in the development of female board representation around quota-implementation.
From figure 3 a considerable variation in the percentage of female directors itself between the six countries can be identified. Unsurprisingly, and in line with table 2, Norway shows the highest percentage of female directors. In contrast to the percentage of Norwegian women directors reported by Ahern and Dittmar (2012), figure 2 shows that the 40% Norwegian quota is not met in the years after quota-implementation.
C. Methodology
This study is analyzing the longer-term impact of gender diversity on firm value, using the implementation of gender quotas as an exogenous instrument. Though implementation of a gender quota provides an exogenous shock to the firm, enforced by national governments, firms could have chosen to respond in various ways to the constraints putted on board composition. These endogenous decisions of firms may confound the relationship between changes of the board and firm value. To address this endogeneity, this study will follow the approach taken by Ahern and Dittmar (2012), by using the pre-quota variation in board gender diversity across firms as an instrument to capture exogenous variation in enforced changes in female board representation over time. Ahern and Dittmar (2012) applied this methodology to the mandatory Norwegian quota, by arguing that, since all firms had to meet the 40% requirement one point in time, the firms that already had more women active on their boards when the quota was implemented, were required to make smaller changes to their boards to comply with the quota than firms that had less female directors initially. Following this reasoning, the same methodology may be applied to firms in other countries implementing so-called mandatory quotas, such as Belgium, France and Italy. In the case of voluntary quotas as in The Netherlands and Spain, firms are encouraged, but not legally enforced to increase the percentage of women on their boards. Still, exogeneity is ensured in these cases since the predicted percentage of women from the first-stage regression will be used within the second stage. Additionally, a performed t-test shows that the female representation in the pre-quota year is significantly different from the female representation in the second year after quota-implementation in both The Netherlands and Spain, suggesting that even female representation was not sanctioned with
26 severe penalties firms did increase their female representation after the voluntary quota was implemented. This observation contradicts the notion made by Pande and Ford (2011) that governments can only increase female representation on corporate boards if they demonstrate willingness to impose penalties for non-compliance. Specifically, anticipation may play a role here. It could be that, based on the Norwegian case where a voluntary quota was replaced by a mandatory quota, Dutch and Spanish firms already anticipate on penalties on non-compliance by increasing gender diversity on boards even no sanctions for non-compliance are introduced.
To measure the exogenous variation in the enforced board change, the percentage a firm is falling short of the quota in the year before quota-implementation is used. For Belgium, France, Italy and the Netherlands the pre-quota year is 2010, for Spain 2006 and for Norway 2005. Based on figure 3 and 4 it is expected that French and Belgian firms already anticipated the quota before the actual implementation. To ensure that gender composition of the board was not yet impacted before quota-implementation, the board gender diversity in the pre-quota year is compared to the board gender diversity in the year two years prior to the quota-implementation. A performed t-test (Appendix E) shows that the female representation in the pre-quota year does not significantly differ from the female representation in the year two years before implementation for Belgium, Italy, The Netherlands, Norway and Spain. However, for France the female representation in 2010 appeared to significantly differ from the female representation in 2009. An explanation for this observation may be the fact that the French quota is implemented in January 2011 and thus may already be expected and anticipated in 2010 by firms. The t-test showed that the female representation in 2008, however, did not significantly differ from the female representation in 2009 in France. Therefore, this study will take into account 2009 as the pre-quota year in France instead of 2010. Though the change in board composition which is enforced by a gender quota will vary by the pre-quota percentage of female directors, Ahern and Dittmar (2012) acknowledge that the pre-quota percentage of women active on corporate boards is not randomly assigned. In other words, before implementation of a gender quota, the number of female directors can be considered a firm’s own choice. Therefore, vigilance must be exercised about spurious correlations if the pre-quota percentage of female directors is correlated with subsequent changes in firm value, unrelated to the changes in the board. To analyze this, the 155 firms having at least one woman on their board in the pre-quota year are compared to the 88 firms having no female directors in that year. Since 29 firms have missing data on female representation in the pre-quota year, these observations are omitted from this comparison-analysis. In line with Ahern and Dittmar (2012) it is found that only firm size and board size are significantly different between the firms with and without female directors (Appendix F). Larger firms are found to be more likely to have at least one women being active on their board of directors. This observation holds for several measures of firm size.
27 The association between firm size and female representation is reported several times in other research (Ahern and Dittmar, 2012; Adams and Ferreira, 2009; Carter et al., 2003). Adams and Ferreira (2003) argue that larger firms have a greater demand for gender diversity, since they get more public attention or since women are more attracted to larger firms and therefore more easily recruited. In line with the observation on firm size, firms with larger boards are found to be more likely to have a female director as well. This observation is also consistent with results from other performed empirical research (Adams and Ferreira, 2009; Carter et al., 2003). In contrast with Adams and Ferreira (2009), but in line with Ahern and Dittmar (2012), Tobin’s Q and ROA are not significantly different between firms having women on their board and firms having no women on their board. Additionally, the industry distribution between the set of firms having no female director in the pre-quota year is compared to the set of firms having at least one female director in the pre-quota year (Appendix G). In line with Ahern and Dittmar (2012), Fisher’s exact test of the difference in the industry distribution by female representation based on the pre-quota year reports no difference between the likelihood of a firm to be in a particular industry. Following the analyses in Appendix F and G, the only major pre-quota differences between firms having zero women and having at least one woman appeared to be firm size and board size. It may be expected that firm size and board size directly influence Tobin’s Q. For example, Yermack (1996) showed that firm size is positively related to Tobin’s Q and that smaller boards had a higher Tobin’s Q, while Jackling and Johl (2009) found that larger boards had a higher Tobin’s Q. Though, in line with Ahern and Dittmar (2012) only firm fixed effects are included in the regression equations of this study, since these firm fixed effects are expected to capture a large part of the determinants of female board representation.
Thus, this study is analyzing the impact of gender diversity on firm value, measured as Tobin’s Q, by making use of the pre-quota variation in female representation on corporate boards as an instrument. Specifically, this study estimates the following two-stage instrumental variables model:
First stage: Female(%)i,t = α + β1 (Year Dummyt * Short Quota (%)i,t=-1) + β2 Short Quota (%)i,t=-1 + Time Fixed Effects + Firm Fixed Effects + εi,t (1) Second stage: Tobin’s Qi,t = α + β1 (Female(%)i,t) + Time Fixed Effects + Firm Fixed Effects + εi,t (2) where Female(%)i,t is the percentage of female board members for firm i in year t, which is instrumented by Year Dummyt and Short Quota (%)i,t=-1 in the second stage of the IV regression. Year Dummyt represents a dummy variable for each year after quota implementation in a particular country and Short Quota (%)i,t=-1 represents the difference between the percentage specified in the particular quota and the percentage of women on a particular’s firm’s board in the pre-quota year. Tobin’s Qi,t is the Tobin’s Q for firm i in year t, as a measure of firm value. In both the first stage and the second stage, time fixed effects,
