Student Number: s1879324
Name: Stellink, K.J.B. (Bas)
Study Program: MSc IFM
Date: 05-01-2015
The Influence of Gender Diversity in the Boardroom on
Corporate Risk Taking and Financial Performance
Abstract
Female leaders are becoming more present at the top of multinational corporations. Their influence reaches from a different view on corporate risk taking as to a differing type of performance management. Several studies consider the influence of women during the last decades regarding corporate risk taking, just as financial performance. To find out how female board members add to a multinational corporation its risk profile and its return on assets, this article will discuss the rise of female executives into the board. Presenting findings that help to understand if female board members and CEOs are influencing corporate risk taking and financial performance, based on statistical tests. This paper discovers unexpected results, just as new research gaps within these fields of study.
Introduction
In today its business world the status quo is changing. For many decades men have been leaders of the largest globally active firms, however statistics show us that women are becoming better educated and are working their way through the so-called ‘glass ceiling.’
In the United States in 2013 women occupied 16.9% of US Fortune 500 board seats (Catalyst, 2014). In the European Union the percentage of women on boards in 2013 was 17.8%1 (EU Gender Equality Report, 2013) and within Australia the Equal Opportunity for Women in the Workplace Agency, EOWA, reported in 2012 that in Australia its 200 largest firms listed on the ASX 200, females represented 12.3% of all board memberships (EOWA, 2012).
Most firms within the US and Australia do however only have one female board member. This creates an image that shows that firms are pressured to have diverse boards and are therefore adding a female member to their boards. This can be described as tokenism as Bourez (2005) describes. She finds that in 2005 only 8% of
Europe its top 200 companies have female board members and that 62% of these firms only have one female board member. This makes it look like a necessity instead of an addition to the board that should lead to better performance and corporate governance.
Since 2005 a lot has changed and today firms are under pressure of governments who are imposing gender quotas in order to give women a better chance on making it to the board.
By adding females to the board of directors a lot changes within both the board and the firm. By just having female board members, a lot already changes, but by even putting a female in charge of a large multinational a lot can change. This should lead to a greater pool of talent for firms, since people can only become good at managing a firm by being in charge of the firm and leading the board.
By adding females to the board diversity increases, this leads to better overall performance as women have unique characteristics that can add to a board (Hillman et al., 2002). Furthermore Erhardt et al. (2003) conclude that demographic diversity leads to better returns on investments and returns on assets. Thus by adding females to a board, firms are already creating an environment in which diverse management leads to better firm performance. Subsequently Adams and Ferreira (2009) have proven that in the long run female directors are more successful. It can therefore be hypothesized that more experienced female executives do not only add diversity to a board but also lead to higher returns. Besides positive influences of diversity and experience there are also a lot of questions that arise when trying to create a more diverse board. Within this paper, research will be conducted on the influence of gender concerning corporate risk taking and the influence of gender on firm performance.
In general when comparing men and women, men tend to be more overconfident, take more risk and are not backing away from competition. Women on the other hand are less confident about their work, are more risk-averse and are more likely to walk away from fierce competition (Croson and Gneezy, 2009).
Questions however remain on how women tend to act within a board of directors concerning corporate risk taking. Does a young CEO take more risky investment decisions? And is there a difference between genders in taking more risky decisions, leading to differing performance of a firm?
These questions will have an interesting answer especially for shareholders investing in firms from which the board consists either out of a heterogeneous team or a homogeneous team. Next to that it will also give insights in how a firm can influence its performance and risk portfolio by forming a diverse team or even electing a female CEO in order to reduce corporate risk taking.
Another point of interest is to find out how female executives are influencing firm performance in the long run compared to the risk they are taking in leading a firm. Therefore this research will try to find out how female executives influence returns on assets together with their possible aversion for risk. It is expected that whenever less risk is being taken, the returns will also be lower, as defensive investments lead to less returns than riskier ones.
Furthermore this paper will present outcomes that can be used in order to assess the corporate risk taking of gender diverse boards and the general influence of women in top management on corporate risk taking and firm financial performance. Even though results are different than expected, conclusions can be drawn on how women are affecting corporate risk taking and what their influence is on a firm its ROA. Next to that other explanatory variables will present significant outcomes leading to new research gaps that can be assessed in future research. Subsequently it is suggested that in order to draw statistically significant results a sample is necessary in which more females are active board members or CEOs, leading to better explanatory results in the future.
sixth and final section the research will be concluded and further research possibilities will be discussed.
Theoretical Framework
As a board of directors, challenges are always in place. In order to function well as a board, one should at least be able to monitor and control management, inform management, monitor compliance with the law and other regulations, and a board is there to link its firm to the external environment (Mallin, 20042; Monks and Minow, 20043).
By fulfilling the needs of a company and its external environment, a board of directors can add certain value to the firm. Whenever the composition of the board therefore changes with a female being added this leads to a higher degree of diversity. And it is known that gender diversity leads to better firm performance as concluded by Erhardt et al. (2003).
When we take a look at corporate risk taking, women are not only adding value to the firm. Several studies indicate that female managers tend to be more risk-averse than men (Eckel and Grossman, 2008; Sapienza et al., 2009; Croson and Gneezy, 2009; Berger, Kick and Schaek, 2014). These outcomes were based on research performed in financial firms such as banks and trading firms. It will therefore be interesting to find out how women are influencing risk taking within a multinational company that is operating worldwide. It is therefore decided that within this research globally operating corporations will be researched.
Before researching corporate risk taking within multinational corporations it is important to get a good understanding of what corporate risk taking exactly is and how it differs from normal ‘firm risk.’ Corporate risk taking is described as the riskiness of investments that a firm makes. In a paper written by John, Litov and Yeung (2008) it is argued that corporate risk taking depends on the self-interests of corporate decision-makers as they are personally affected by the choices they make, taking more or less risk, leading to growth or not. Therefore corporate risk taking differs from firm risk as risk taking depends on the behaviour of a firm in investing its assets, while firm risk depends on a firm its solvability or liquidity for instance and the possibility of a firm being able to pay its bills or not. Now that it is explained how
2 Mallin C.A., 2004. Corporate Governance. Oxford: Oxford University Press.
corporate risk taking differs from risk, we move on with the theory discussing a multinational corporation, followed by corporate risk taking influenced by gender and demographics.
‘A multinational corporation consists out of a group of geographically dispersed and goal-disparate organizations that include its headquarters and the different national subsidiaries (Ghoshal and Bartlett, 1990)’. Furthermore a multinational corporation is described as ‘a firm which arises out of its superior efficiency as an organizational vehicle by which to transfer knowledge across borders (Kogut and Zander, 1993).’ Because a multinational corporation acts on a global scale, other firms are trying to copy what they are doing; governments see these firms as country flagships. Therefore researching these firms is highly interesting as they can be seen as the leaders of the modern-day business world, leading by example for instance putting women on their boards in order to live up to a certain quota or to strengthen the position of females at the top.
Moving on to another aspect, which has been highly researched, is the influence of demographics on risk aversion. It is proven that younger executives tend to take more risky investment decisions, creating larger financial risks for their firms. Berger, Kick and Schaek (2014) presented that within financial organizations young executives took more risk than older- and more experienced executives leading to an increase in high-risk investments. It is therefore important to take age into account concerning demography. Questioning the influence of both gender combined with age and thus experience, the first hypothesis is formulated:
H1: On average younger multinational company boards increase firm risk taking due to their inexperience as a board member.
In a study conducted by Croson and Gneezy (2009) it is found that ‘in general women are more risk averse than men in the vast majority of environments and tasks.’ Melissa L. Finucane et al. (2000) made an interesting finding concerning this statement, that only whites have risk-aversion differences between both genders. That is what she concluded after having conducted a study in which ethnically diverse groups were studied. This is interesting because in this paper most of the boards that are being researched consist out of white males and females. Returning to the study presented by Croson and Gneezy (2009) another finding is presented that is useful for this current research. When both males and females have to decide how much risk they are willing to take, the outcomes are similar when it concerns small stakes. However when the stakes are high and there is a financial risk, women tend to be more averse. Croson and Gneezy (2009) conclude that women are ‘more risk-averse in a lab setting as well as in investment decisions in the field.’
Others have however proven that female directors also tend to be more risk loving. In their article, Adams and Funk (2012) concluded that female board members are less focussed on traditions and security, which does not comply with earlier studies conducted, presented before, that women are more risk-averse than men are. Moreover they present that within the boardroom, women are ‘a-typical’ compared to women in society. It is argued that within their sample of female directors that these board members care less about ‘security, conformity and tradition, but more about stimulation.’ Therefore it is interesting to see that in other research it is concluded that female board members tent to lead to better performance of firms (Hillman et al., 2002; Erhardt et al., 2003), which is an outcome in most cases of stimulation. Adams and Funk (2012) however only focussed on Sweden, having them questioning the outcomes, stating that it is hard to generalize results, which have been presented out of a single study, conducted in a single country.
These findings bring us to the second hypothesis:
H2: Female managers and directors increase multinational corporate risk taking concerning investment decisions even though they tend to be more risk-averse.
Another influencing factor concerning risk aversion is job experience. Berger, Kick and Schaek (2014) concluded that female board members are overall less experienced in leading a firm, since most women are fairly new in holding a board position. It is concluded that inexperienced board members increase a firm its portfolio risk, therefore female board members increase a firm its overall risk. By this is meant that due to their inexperience females tend to take more decisions on investment that would cause a firm in taking on more risk. Next to that it is concluded that firms who are exposed to a lot of risk, are not electing female executives to their board due to the extra risk that this brings about. These findings were also presented in a study conducted by Farrell and Hersch (2005), who claim that in uncertain situations homogeneity is more valuable. They are therefore arguing that a gender diverse board fosters performance only in economically stable situations. This implies that in economically unstable times females are not being elected on boards as this may harm the firm even more. It however contrasts with the fact that women have shown to be more successful executives in the long run, leading to higher returns on assets and lower volatility (Adams and Ferreira, 2009). Returning to the statement of Berger, Kick and Schaek (2014), females are overall less experienced. In order to find out how they perform in the longer run it will be interesting to see how they perform over a period of several years as CEO of a firm. This brings us to the third hypothesis, which is:
H3: Female CEOs are positively affecting performance, leading to higher returns, and firm risk taking in the long run for multinational corporations.
outcomes Farrell and Hersch (2004) tried to find evidence confirming that adding more women to a board of directors is a value enhancing strategy. Therefore it can be argued that even tough females add important characteristics to a board, which fosters performance, it cannot be concluded that adding females to a board is a value enhancing strategy. By concluding this it can be stated that in order to influence corporate risk taking and firm performance, both males and females need to possess certain characteristics in order to successfully lead a firm. These characteristics vary between gender traits and demographics. Mohan (2014) touches upon masculine versus feminine leadership styles that differ in gender traits. Women tend to be focused on ‘co-operation, communication and interpersonal skills to accomplish goals, while males act based on rationality, toughness, self-interest and domination’ (Mohan, 2014). These traits can be seen as a basis for being risk-averse or risk-taking. Women will tend to work better with others and base their choices on opinions of their peers, while males are more confident of their own interpretation and act upon that.
Corporate risk taking can be measured in several ways, by reviewing the portfolio risk, acquisitioning of other firms, investing in unknown business areas, but also financing day-to-day operations with a high amount of debt. Therefore it will be interesting to find out if firms take more risk when adding less experienced, younger female members to their board increasing their volatility of earnings. Subsequently this means that whenever a firm experience a high volatility in its earnings, there is a high amount of risk-taking involved as concluded by John et al. (2008).
In the end board members are being evaluated on their performance and especially the financial performance of the firm they are leading. Boards are assigned by shareholders in order to increase their wealth and to act in their best interests. Several theories have been developed over the years in which is explained how board members are in charge of daily operations in order to generate profits for their shareholders, such as the resource dependence theory (Pfeffer and Salancik, 1978) or the agency theory (Berle and Means, 1932). It is therefore important to take financial performance into account when researching how much risk corporations take by adding both inexperienced young executives to their boards and what the benefits are of having a gender diverse board.
role of female directors. The provided evidence could contribute to the role of women in the international business world by testing how they influence a firm its corporate risk taking by creating heterogeneity, testing female influence in the long run and finding out if older female executives have a different influence on firm risk taking than female executives who are younger than their colleague board members.
Data and Methodology
This section introduces the dataset and explains the research methodology.
This research conducts an empirical analysis of data, we use data provided by Catalyst, the European Union on Justice and Gender Equality and the Equal Opportunity for Women in the Workplace Agency. Through the provision of data of these three agencies, a sample will be combined out of Australian firms, European firms and United States firms, all represented on one of the largest stock exchanges of each country or union. Observations will be made for the period 2009 – 2013, a five-year period in which a sample of 102 firms is used in order to perform all necessary analyses. The above-presented agencies provide us with the data on female board members and CEOs who have been working within the largest firms in their countries operating on a global scale. Table I presents the summary statistics of the amount of firms, CEOs and the gender distribution, and the amount of single observations from 5 years in total and per country or union.
Table I Data Sample Statistics
The sample consists out of 102 firms located in Australia, France, Germany, Netherlands, Sweden, the United Kingdom and the United States. All firms are listed on the largest stock exchange of their countries. Boardroom information is gained trough year reports, company websites and the database of Reuters, Bloomberg and Orbis. The sample is taken from the period 2009-2013, a 5-year period in which financial data and demographic data is retrieved in order to perform this research.
The required analyses use a combination of both firm specific effects and manager characteristics. Because of that, it is necessary to separate firm fixed effects from manager characteristics in order to not have them influence each other in any manner. By doing so unbiased outcomes will be presented regarding demographics in general, the influence of female board members on corporate risk taking and firm performance, compared to situations in which board consist out of only males.
The sources that provide data are the above-described agencies, besides these three sources, data is also generated from the ‘Orbis’ database regarding information on both male and female board members and firm financials. By generating data from ‘Orbis’ it can be crosschecked how many female board members are in place, at what time they have been appointed and information on their background, regarding education, career and age. Descriptive statistics can be found in Table II presented on this page. Furthermore correlation matrices have been created to see if there is any multicollinearity between the independent variables, these are presented in table III a. and III b. It can however be noticed that most variables are negatively correlated with one another, but none of them is close to either -1.00 or 1.00 which are the boundaries for perfect correlation. It can therefore be concluded that none of the used variables is biasing another variable in predicting the outcomes of the tests due to multicollinearity.
Table II
Descriptive Statistics of Variables
Variable N Mean Median STD Minimum Maximum Jarque-Bera Probability
Firm Risk 102 0.196 0.062 0.738 0.011 7.117 25087.53 0.000 Female CEO/Board 58 0.108 0.061 0.181 0.011 1.249 1960.455 0.000 Male CEO/Board 44 0.310 0.066 1.101 0.015 7.117 2111.336 0.000 Return on Assets Executives Age 61 102 0.028 54.741 0.015 54.625 0.035 3.825 0.000 41.500 0.145 65.813 43.218 11.533 0.000 0.003
Firm Size 102 13743097 4032814 27584599 31039.84 1.81E+08 2931.235 0.000
In order to find out how females are influencing their fellow board members a sample is being selected of firms with both a diverse board, including women, and firms with a board consisting out of only men. In order to make the right assumptions the firms in this research its sample need to contain the same amount of board members in order to draw the right conclusions. Furthermore, firms are not in specific industries generalizing results on female CEO or board membership between multinational corporations acting in different segments. As Berger, Kick and Schaek (2014) discussed in their research sample, board size needs to be constant, since changes in the size of the board may have other implications for the firm. It is stated that ‘it is very likely that adding an additional senior executive to the bank’s executive board, such as a chief risk or chief loan officer, impacts the team’s decision-making process and may be driven by endogenous factors’ (Berger, Kick and Schaek, 2014). In order to test the hypotheses presented in section two, the influence on corporate risk taking of age needs to be calculated. Second the effect of adding women to the board will be calculated. This will bring about a change in board composition either from zero to one woman in the board of directors or by decreasing the amount of women from one to zero. In order to test this, a dummy variable will be added to the formula. Both these actions should result in a change in corporate risk taking. It is therefore important to keep board size constant in order to perform the best possible tests on these samples. Finally a test is performed in order to find out how the presence of women influences corporate risk taking and firm performance in the long run.
Table III a.
Covariance Correlation Table Firm Risk
Firm Risk Gender Executives
Age
Tenure Firm Age Firm Size
Table III b.
Covariance Correlation Table ROA
ROA Gender CEO Age Tenure Firm Age Firm Size
ROA 1.000000 Gender -0.023491 1.000000 CEO Age -0.317807 -0.181939 1.000000 Tenure -0.129319 -0.147369 0.406322 1.000000 Firm Age -0.241369 0.218274 -0.021626 -0.132240 1.000000 Firm Size -0.272457 0.051820 -0.075321 -0.028045 0.167711 1.000000
Before testing if female presence within the board leads to a higher volatility and a higher corporate risk taking level, it is important to find out how age relates to the phenomenon of risk taking within boards. As described, demographics have a big impact and therefore this research uses the average age of the board in order to find out if, on average, younger boards are overall more or less risk-averse. In earlier research it is concluded that younger boards tend to take more risk (Berger, Kick and Schaek, 2014). These researchers have however only researched banks in their paper. The tests performed in this current research give insights into the effects of age and especially on adding younger women to the board. By testing this first, we can draw better conclusions on the results drawn from testing hypotheses 2 and 3.
As described in the theory section, corporate risk taking can be defined in several ways. Within this paper risk taking is defined by the deviation of the firm its EBITDA/Assets after which the standard deviation is calculated per firm for this measure, just as John et al. (2008) performed in their research in analysing corporate risk taking. By calculating the level of risk test can be performed with several independent variables therefore the influence of Board member age will be tested as well as Firm Size, both for firm i at time t. This will indicate if both the average age of directors and size of a firm are influencing firm risk either positively or negatively. The first performed analyses will be a simple Ordinary Least Squares test in which it is tested how Corporate Risk Taking, noted as FirmRiski,t, is influenced by the
independent variables ExecutiveAgei,t and FirmSizei,t-1. ExecutiveAgei,t is calculated as
the natural logarithm of the average executive age for firm i at time t, while FirmSizei,t-1 is measured as the logarithm of their net assets in US dollars for last year
FirmRiski,t = β1 * ExecutivesAgei,t + β2 * FirmSizei,t-1 + εi,t (1)
To test the influence of women on risk this paper relates certain risk measures to manager characteristics as described, therefore the following equation is used:
FirmRiski,t = β1 * GenderDummyi,t + β2 * ExecutivesAgei,t + β3 * Tenurei,t +
β4 * FirmAgei, t-1 + β5 * FirmSizei,t-1 + εi,t (2)
Following this equation, corporate risk taking is measured. The GenderDummyi,t takes
on value 1 in case of one or more females active as a board member and 0 otherwise for firm i at time t. When this variable tests negative, this means that female board members tend to take less risk. It is suggested that when calculating risk, both age and size of the firm should be taken into account (Chevalier and Ellison, 1997; Niessen and Ruenzi, 2007). Thus both FirmAgei, t-1 and FirmSizei,t-1 are taken into account.
Age is hereby defined as the logarithm of firm i in years and size is defined as the logarithm of the firm its net assets in United States Dollars, again for the last available year.
The second equation will also be tested within OLS model estimation, trying to find out what independent variables are affecting firm risk the most and if this affection is significant. It is especially interesting to find out, besides gender, what other variables influence the corporate risk taking of a firm. As with the first performed test, our complete sample of firms is used, leading to 102 firms in an equivalent amount of independent years for the second test.
the CEO level were strongly associated with better performance measured on different points e.g. Tobin’s Q, ROA and ROE.’
In a study conducted in 2013 by Khan and Vieito, results were published in which it was concluded that female-led firms have a higher ROA and a lower risk portfolio. The risk was measured trough the volatility of the firm its stock price. Another researcher (Kolev, 2012) concluded that ‘female-led companies underperform their male counterparts by about .35% per month’ it was however not clear what the exact cause of this underperformance was. It is therefore important to find out how female-led firms differ from male-female-led firms in order to come up with a conclusion that leads to an answer, which can be generalized.
To test if female board members have a positive influence on a firm’s Return On Assets we take the following independent variables into account: Age, Tenure, Firm Size and Firm Age. By measuring these independent variables in which Firm Size and Firm Age are firm constants, it is measured how female CEOs affect a firm its Return on Assets, by looking at their age and the time they have been on the job as leader of a firm. These variables will be measured for the years 2011 – 2013. This set of data consists out of 61 firm observations instead of 102, leading to 183 independent yearly observations.
The sample became smaller as for some of the firms within the complete dataset crucial data was missing over the period in which tests are being conducted. Next to that the third test tries to find out what the influence of a difference in CEO gender does compared to a test in which general board members are being compared, as is the case with the first two hypotheses.
From these 61 firms the ROA will be tested over a period of three years in which ROA is measured as a percentage of the returns to assets. In order to see how ROA is changing within these years and what the influence is of several independent factors year dummies are added for the years 2011 and 2012. By including dummies the years 2011 and 2012 are either getting the value 0 or 1 for the Return on Assets. It is not possible to include industry or country dummies since the female versus male distribution is not equal in each country. This could then lead to biased outcomes that are not worthwhile for the sake of this research article.
influence of gender on both firm performance and corporate risk taking. The third hypothesis will also be tested using an Ordinary Least Squares test. By finding out what variable influences ROA positively or negatively, conclusions can possibly be drawn that provide us with valuable information regarding financial firm performance.
ROAi,t = β1 * GenderDummyi,t + β2 * CEO Agei,t + β3 * Tenurei,t + β4*FirmSizei,t+ β5 *
FirmAgei,t + εi,t (3)
Testing the final hypothesis will give us insights into the influence of age and gender differences between both male and female CEOs. These gender differences will eventually explain what the influence of women is regarding risk, next to that conclusions will be drawn on the performance of a firm when led by a female compared to a male leader.
Results
In this section evidence will be provided for the hypotheses discussed in section 2 of this article. Furthermore the provided methodology is used to test the given formulas that should lead to outcomes from which one can discuss and draw conclusions.
The regression models used are aimed at a stepwise exploration in order to explain the link between corporate risk taking, firm performance and gender. Table III provides us with the descriptive statistics regarding our tested parameters.
Table IV
Corporate Risk Taking and age
The test that has been conducted was an OLS Regression that provided us with the above-presented results regarding the first hypothesis. The basis of this test comes from the artricle of Berger, Kick and Schaek (2014) who actively researched the influence of age on executives’ corporate risk taking within banks. Just as they challenged their hypothesis by calculating corporate risk taking as the EBITDA/Assets, this paper calculates corporate risk taking in a similar way. However the possibility to take the Herfindahl Hirschman Index into account based on certain banking sectors was not possible, due to multinational corporations in our sample being active in different industries and located in different countries. Furthermore Berger, Kick and Schaek (2014) had a larger sample containing more demographic data and they took education into account as well, this was however not possible to include as for the current sample education information was not readily available. Therefore the choice was made to simply test the influence of the average board age compared to the corporate risk taking, taking firm size into account as a control variable, this was also done by Niessen and Ruenzi (2007) who suggest that when testing corporate risk taking size should be taken into account as this can influence an executives’ risk taking. Niessen and Ruenzi (2007) are furthermore also acknowledging that executive age influences risk taking, combining this with the research of Berger, Kick and Schaek (2014) it was chosen to test the first hypothesis
FirmRiski,t = β1 * ExecutivesAgei,t + β2 * FirmSizei,t-1 + εi,t
Corporate Risk Taking is measured by the standard deviation of a firm its EBITDA/Assets.
ExecutivesAgei,t is the natural logarithm of the average age of the board of directors. Firm Size
is measured by the natural logarithm of Net Assets. Reported are the coefficients for each of the variables, their corresponding t-values in parentheses. Significance is indicated by ***, **, *, at respectively 1%, 5%, and 10% level.
the way we have done, as the basis was provided by the above presented researchers. The inability to collect the same control variables as Berger, Kick and Schaek (2014) will be discussed in a later stage of this article.
Table V
Corporate Risk Taking and Gender
In table V the results are presented regarding the influence of gender on corporate risk taking. The model was created based the research of Berger, Kick and Schaek (2014) who use all of the above presented variables in their research as well, except Firm Age and Firm Size, two variables that have been chosen as control variables, something which has been done before by Niessen and Ruenzi (2007), based on an earlier research conducted by Chevalier and Ellison (1997). The coefficients of our main variables show that gender is negatively influencing corporate risk taking, meaning that if a female is present in the board, corporate risk taking decreases. However the coefficient is not significant, therefore it is not possible to state that females do create a higher corporate risk taking profile for firms. Furthermore only Tenure measured as the average amount of years of being present on a board influences corporate risk taking positively, meaning that more board experience leads to a decrease in corporate risk. In comparison to the first provided tests, the second
FirmRiski,t = β1 * GenderDummyi,t + β2 * ExecutivesAgei,t + β3 * Tenurei,t +
β4 * FirmAgei, t-1 + β5 * FirmSizei,t-1 + εi,t
Firm Risk is measured by the standard deviation of the firm its EBITDA/Assets. Gender is
measured as dummy variable given a 0 in case of no female CEO or board member and a 1 in
case of a female CEO or board member. Executives Agei,t is the natural logarithm of the
average age of the board of directors. Tenure is measured as the average amount in years of
being a firm CEO. Firm Agei,t-1 is measured as the logarithm of years that the firm is in
existence. Firm Sizei,t-1 is measured by the natural logarithm of Net Assets.
Reported are the coefficients for each of the variables, their corresponding t-values in parentheses. Significance is indicated by ***, **, *, at respectively 1%, 5%, and 10% level.
model is showing an improved fit with the data as the adjusted R2 went up and the F-statistic shows significance, it can therefore be stated that the second model fits the set of data and is significant at a 5% level. Furthermore none of the other independent variables show significance, we can therefore not draw any conclusions regarding the influence of these factors on corporate risk taking.
Next the final hypothesis test results will be presented in table VI.
Table VI
Return on Assets and Gender
In the results presented above it is shown that ROA is negatively influenced by gender whenever we consider the Gender Dummy. It is therefore possible to conclude that ROA is negatively influenced by female CEOs within a multinational corporation, as Gender is significant at a 1% level (p=0.0023). Next CEO Age shows
ROAi,t = β1 * GenderDummyi,t + β2 * CEO Agei,t + β3 * Tenurei,t + β4 * FirmAgei,t +
β5*FirmSizei,t + β6*2012Dummy + β7*2011Dummy + εi,t
Return On Assets is measured as the average ROA in percentages of 2011-2013, measuring
three consecutive years. Gender is measured as dummy variable given a 0 in case of no female CEO or board member and a 1 in case of a female CEO. Tenure is measured as the
average amount in years of being a firm CEO. Firm Agei,t-1 is measured as the logarithm of
years that the firm is in existence. Firm Sizei,t-1 is measured by the natural logarithm of Net
Assets. Year dummies are included to measure differences in years between the period of 2011-2013.
Reported are the coefficients for each of the variables, their corresponding t-values in parentheses. Significance is indicated by ***, **, *, at respectively 1%, 5%, and 10% level.
that older CEOs tend to have a negative effect on ROA, the effect is very small but it can be stated that there is a significant indicator (p=0.0024) showing the CEOs age is negatively affecting firm results. Tenure is influencing ROA negatively as well, even though this influence is almost zero, it is however significant at a 1% level (p=0.0013). Furthermore Firm Size influences ROA positively and is significant, Firm Size is significant at the 10% level (p=0.0823).
The third hypothesis model tested also seems to fit the data better than with the first two tests as the R2 is now higher than before. Subsequently the F-statistic shows significance at the 1% level (p=0.0003) confirming the fitting of the data to the model. The chosen method in this test is again based on the research performed by Berger, Kick and Schaek (2014) combined with the control variables subtracted from the article written by Niessen and Ruenzi (2007). By adding several variables and having them test performance instead of corporate risk taking, we found evidence that several variables such as Gender, CEO Age, Tenure, and Firm Size are influencing a multinational corporation’s Return on Assets within the particular period in which the tests have been performed.
Discussion
As can be concluded from the results presented in the previous section of this article, the hypotheses stated in the theory section could not be proven. Contrary to the expectations of all three hypotheses the regression results show that two do not hold and the third hypothesis should be rejected.
With regard to the first hypothesis we cannot conclude that both age and firm size are influencing corporate risk taking as expected. In their article Berger, Kick and Schaek (2014) concluded that the younger executives are less experienced and more risk loving, leading to higher corporate risk taking. The results that they present are both statistically and economically large as their dependent variable shows a large upswing in the period that they have run their tests, showing a large increase in corporate risk taking. Besides the research conducted by Berger, Kick and Schaek (2014), Serfling (2013) discovered that ‘older CEOs tend to take less risk, invest less money in research and development, diversify more than younger CEOs and maintain lower operating leverage,’ this tells us that age is impacting corporate risk taking for sure, both at the executive level as at the CEO level, at the top of the board. Next to the fact that older CEOs tend to take less risk, Serfling (2013) discovered that younger CEOs take more risk and thus proves the same outcome as Berger, Kick and Schaek (2014) did, stating that younger executives lead to a higher risk portfolio due to riskier investments.
Another interesting finding regarding the impact of age was found by Wang and Hsu (2013), they studies the impact of age heterogeneity on corporate risk taking and find that it is best to have a board in which ages differ. That way a diverse environment is created which leads to an overall better performance of the firm, just as is the case with a gender diverse board regarding performance. We will get back to this when discussing our third and final conducted test.
By reviewing different outcomes regarding the influence of age on corporate risk taking, it is hard to conclude on the outcomes of this research. As none of the variables show significance regarding corporate risk taking it is impossible to accept or reject the first hypothesis regarding the impact of age. This probably is an effect of a data sample, which was too small.
better, leading to more single observations from which conclusions can be drawn easier. As none of the variables were insignificant, just as the model, no more can be discussed regarding the results from the first performed test.
Moving to the second tested hypothesis, a little more can be discussed. The statistical model showed that there was a fit with the data, which was a certain improvement compared to the first test. The second hypothesis was based on the expectation that female executives or CEOs would increase the corporate risk taking. Earlier conducted studies proved that this was correct for certain industries such as the banking industry (Berger, Kick and Schaek, 2014) or the manufacturing industry (Niessen and Ruenzi, 2007). However regarding the second hypothesis this research does not enable us to draw conclusions based on the statistical test results as there is only one explanatory variable that shows statistical significance.
It seems that gender is not influencing corporate risk taking within this data sample, even though we would have expected it to be. As women tend to be more risk-averse in both experimental (Croson and Gneezy, 2009) and corporate settings (Barber and Odean, 2001; Niessen and Ruenzi, 2007), it was therefore that hypotheses were developed which would show that also in a sample with multinational firms women would lead to a potential higher risk when they would be active as an executive or CEO. However regarding the results the assumption holds that women do not influence corporate risk taking in a different way than men do. Another rather interesting finding is however presented, namely the influence of tenure.
Tenure is influencing corporate risk taking, meaning that whenever a board member or CEO is in its position for a longer period of time, the corporate risk taking goes up. We would expect that people who are more experienced on the job should lower the corporate risk taking. Nevertheless by reviewing these results it can be stated that a higher degree of corporate risk taking is measured when tenure goes up, meaning that longer board positions result in riskier investment decisions for a firm. This outcome is interesting as there is currently no research done on the influence of tenure of a board member impacting the corporate risk taking within a firm. It is therefore worthwhile to research this topic more in detail in the future, in order to create a better understanding on the influence of tenure regarding corporate risk taking.
is expected that limited data availability is the main issue here and therefore the results are biased.
The final performed test dealt with the influence of gender on financial performance of a firm. However the results now show significance with most variables, contrary to the earlier performed tests. Gender is negatively influencing firm performance regarding ROA, which leads to a hypothesis that has to be rejected as it was expected that female CEOs would improve firm performance. This holds with what was concluded by Kolev (2012), who claimed that female-led companies underperformed male-led counterparts. This finding is therefore in line with what he already discovered. We may conclude that due to female leadership within multinational corporations over a longer period of time, the return on assets is negatively influenced.
Next the age of the CEO comes forth as a significant variable, which is negatively influencing return on assets. This means that whenever a CEO becomes older and is in charge of a multinational corporation, the return on assets decrease. This conclusion was also drawn by Serfling (2013) who concluded that whenever CEOs become older they are not willing to take very much risk, as described at an earlier stage, and performance tends to decrease. This comes forth out of a decrease in investments, which in term lowers risk taking but returns as well.
Concerning the risk taking we cannot conclude anything, however as significance is presented regarding CEO age we can. In order to find out if CEO age is also influencing corporate risk taking within multinational corporations more research is required.
The third outcome is that Tenure in the case of performance is of negative influence. Within the second test Tenure positively influenced corporate risk taking leading to more risk, however firm performance is negatively associated with it. It means that whenever a leader is longer in place the ROA decreases. This could come forth out of the inability to innovate, but since the coefficient is very small this should be researched in further depth in order to draw conclusions. As already touched upon Tenure is a subject which has not been researched that much, therefore this finding is interesting and leads to a new gap with regard to its influence on both board members, CEOs and firms.
with the Tenure variable this influence is only very small and it is significant at a 10% level, which does not provide very strong evidence, it is however worthwhile noticing. Therefore this article concludes that in the case of gender influencing ROA, Firm Size is of positive influence, which leads to higher returns if a multinational corporation is larger.
Reviewing the outcomes of the statistical analyses of this research paper it can be concluded that for now, the influence of age and gender on corporate risk cannot be proven. With regard to financial performance, the third hypothesis could only be rejected as results showed us that females are negatively influencing ROA, just as concluded by Kolev (2012), women negatively influence a firm its returns.
In order to provide evidence regarding the influence of age and gender on corporate risk taking a larger dataset would have been the solution to the issue. However due to the unavailability of data regarding females at the top of multinational firms it has not been possible to create a statistical basis that led to the acceptance of the presented hypotheses regarding corporate risk taking, with regard to the financial performance H3 was rejected, but the dataset has proven us that several variables do influence a firm its ROA. Concerning the first two hypothesis suggestions will be made further on and the rise of women will now be discussed as this led to challenges within this research.
performed, however as already noted, in the near future performing the same research with a larger set of data on female board members is expected to improve current results and outcomes. It has been proven in earlier conducted research that females add to a firm its financial performance, but that female executives in the banking sector lead to a higher corporate risk profile. However no proof is present regarding the influence of females within multinational corporations, doing business in countries all over the globe. It was therefore that this research was designed in order to create understanding of the female influence within these firms. As discussed, our hypotheses concerning corporate risk taking could however not be proven and several factors could have possibly influenced these outcomes. These factors will be discussed in the next section that will conclude this research. Besides the conclusions, limitations will be discussed just as suggestions for future research.
Conclusions
The relationship between female executives and corporate risk taking is a field, which is interesting to study as more females make it to the top nowadays. Subsequently the influence of gender on firm performance and demographics such as age are highly researched. Therefore this research has tried to contribute to this gap by researching all three of these factors regarding their influence on corporate risk taking and firm financial performance.
By having reviewed the existing literature, a gap that was still present came up, namely the influence of gender and age regarding corporate risk taking in an international setting. Therefore the choice has been made to research companies who are represented on the largest stock exchanges in Australia, Europe and the United States of America.
Based on the existing literature it was expected that age would have had a negative influence on corporate risk taking, meaning that younger executives would lead to a higher corporate risk portfolio than having executives who are older and have more experience on being a director of an international firm. Even though existing literature proved that age was of any influence, the presented results could not make us accept or reject our first hypothesis due to insignificant test results.
mind, firms within different industries operating on a global scale would also be negatively influenced because of female presence in their boards regarding corporate risk. Following the statistical results it has not been possible to draw significant conclusions regarding this issue. In order to draw conclusions on this research gap, more data should be used in future research. It will also become easier to study these issues as more female executives make it all the way to the boardroom.
The final hypothesis tested concerned the influence of gender on firm financial performance. Here it turned out that gender influence could be proven, however the literature strongly proved that gender is influencing board diversity what in term leads to better financial performance of a firm. Nonetheless this research concludes that gender is negatively influencing financial firm performance whenever a female is in charge of a firm for a longer period of time. Subsequently it was found that CEO age, Tenure and Firm Size do influence a firm its return on assets, both positively and negatively. These findings are interesting to see and this is a subject that is worthwhile researching in the future, testing how influential CEOs are with respect to a firm its financial performance.
Limitations and Suggestions for Further Research
This study is, just as any study, not without limitations. As a matter of fact, most of our explanatory variables (both independent- and control variables) turned out to be insignificant. This means that as described before, conclusions can hardly be drawn. The cause of this issue has to do with the limited data availability on female board members and CEOs in Australia, Europe and the United States. Since we could only use a sample of around 100 multinational corporations active in the different parts of the world, the sample turned out to be really small. Therefore the suggestion should be made that this research should be reproduced in several more years, as gender quotas are being put in place at this moment, leading to a larger set of data. This will most likely lead to more significant outcomes regarding the gender issues.
Concerning the influence of age, data was also too limited. Therefore it should be suggested that in order to test the influence of age on corporate risk taking, a larger set of data should be used, within a different type of study. This study should not combine both gender and age, but focus on rather one of these two demographic aspects.
Other suggestions are to research the influence of tenure on corporate risk taking and financial performance. Besides the fact that the variable showed a significant outcome in both tests, it has not been highly researched yet, making it an interesting gap to study. Especially because it turned out to be positively associated with corporate risk taking, leading to more risk, and negatively associated with firm financial performance, leading to worsening returns.
Overall the suggestion is made that this research should be reproduced using a larger data set, consisting out of more firms with female board members or CEOs in order to be able to draw better statistically significant conclusions in future research.
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