B.Ding/ MSc Thesis IFM (2017)
Gender diversity in top management teams and firm performance
A panel data investigation of 187 European firms
Bingjing Ding
1Supervisor: Prof. Dr Boudewijn de Bruin
Co-assessor: Prof. Dr. Bert Scholtens
University of Groningen
Faculty of Economics and Business MSc International Financial Management
Abstract:
This paper examines how and under what circumstances gender diversity in top management teams influences firm performance. Based on unbalanced panel data of 187 large firms in 18 European countries during the period from 2010 to 2015, the results indicate that gender diversity in TMTs has a negative impact on firm performance Tobin’s q and that country-level shareholder protection is negative with regards to the effect of gender diverse TMTs on firm performance Tobin’s q. The findings suggest that companies should not hire more female executives in top management teams, and companies in countries with stronger shareholder protection should allocate more rights and offer more protections to gender diverse top management teams.
Keywords: gender diversity, top management team, firm financial performance, Tobin’s q
1. Introduction
With the development of society, women have become active in professions that have made enormous contributions to society. However, their efforts and contributions are usually ignored. Although gender inequality is improving, women still cannot get the same opportunities in the workplace as men. Women are rarely represented in senior executive positions around the world, which leads to them being underrepresented of females in top management teams (TMT) (Oakley, 2000; Helfat et al., 2006). The low percentage of senior executive positions for women serves as evidence of the existence of gender discrimination in the workplace. In the public’s eye, women seem to perform less well because they do not have the same opportunities to demonstrate their capabilities as their male counterparts.
Gender discrimination exists, but the mix of men and women in the workplace indeed brings more benefits to an organization because diverse groups create more possibilities to solve problems. Dallas (2002) denotes that diverse groups look at problems from different perspectives because they have different knowledge, experience, judgment, and backgrounds, thus the quality of decisions made by gender diverse groups is superior to that of non-gender diverse groups. Many previous studies provide evidence that gender diversity in TMTs creates a higher return, which is positive to firm performance (Dwyer et al., 2003; Smith et al., 2006; Welbourne et al., 2007; Krishnan and Parsons, 2008). However, several studies indicate that gender diversity is negative to firm performance or there is no relationship between them (Adams and Ferreira, 2009; Rose, 2007). Although most prior studies confirm the relationship between gender diverse TMTs and firm performance and also emphasize the advantages and the necessity of a higher proportion of women in senior management teams, there are few studies that have explained why gender diverse TMTs have an impact on firm performance and how a higher proportion of women in top management can bring higher return to firms.
TMTs influence firm performance. Therefore, the research questions for this investigation are as follow: Does gender diversity in TMTs improve firm performance? If so, how and under what circumstances gender diverse TMTs affect firm performance? Based on agency theory, resources dependency theory, human capital theory, and upper echelons theory, four moderators risk taking, innovation intensity, ethical intensity, and country-level shareholder protection from financial perceptive, firm strategy, corporate governance, and country-level factor are proposed to have an impact on the performance of gender diverse TMTs respectively.
Internationally, European countries have a higher percentage of women in top management positions (Smith et al., 2006). Some European governments have introduced specific regulations for females to guarantee that they have the same opportunities in firms (Smith et al., 2006). In order to examine the effect of gender diversity in TMTs on firm performance, this study uses unbalanced panel data consist of a sample of maximum 1116 firm-year observations on large firms from 18 European countries over the research period from 2010 to 2015. For testing hypotheses, interaction is applied to examine the relationship between gender diversity in TMTs and four moderators (risk taking, innovation intensity, ethical intensity, and country-level shareholder protection). A time fixed effects model and one-year lagged value of female representation variables are applied to deal with the problems of endogeneity.
to gender diverse TMTs in order to balance the decision power between TMT and minority shareholders, which can prevent the effect of gender diverse TMT on firm performance declining.
This paper consists of the six sections. The first section is the introduction. The second section is the literature review, which contains a discussion of four relevant theories. The third section is hypothesis development. The fourth section is the methodology, which includes sample description, variable definitions, model estimation, and the process of data selection. Descriptive statistics, regression results, and the results of a robustness test are provided in the fifth section. The last section is the conclusion, which consists of conclusion, limitations, and implications.
2. Literature review
In this section, there are four relevant theories are applied to predict the effect of gender diversity on firm performance.
2.1 Top management team and firm performance
A top management team (TMT) is hired to manage the operation of a firm, which is a core decision-making group consisting of the highest-ranking decision-makers in a firm, such as the chief executive officer (CEO), the chief financial officer (CFO), and the chief operating officer (COO), and etc. (Hambrick and Mason, 1984; Tihanyi et al., 2000). According to the definition of TMT, to a large extent, the performance of a TMT represents the entire firm performance as the members in this team make the most important strategies and decisions for the firm (Hambrick and Mason, 1984; Yang and Wang, 2014). Therefore, what happens inside TMTs is directly related to firm performance. Gender diversity is regarded as a required innovative characteristic in TMTs (Richard et al., 2004). The differences between men and women in TMTs should be related to firm performance directly.
2.2 Agency theory
decision-making authority to the agent’ (Jensen and Meckling, 1976:308). Because of the control separation and difference, an agency problem stems from the conflict when the interests that between the principals and the agents are not the same (Jensen and Meckling, 1976; Crutchley and Hansen, 1989). The main consequence of agency problem is an increase in agency costs, which reduces the profits of principal (Belloc, 2010). An effective leadership is a way to mitigate agency problems (Fama and Jensen, 1983). Females in this case are more willing to participate in management, supervise activities, and interact with employees as opposed to their male counterparts, which increase the effectiveness of leadership of TMTs (Adams and Ferreira, 2009; Post, 2005). Thus, the leadership styles of women in TMTs mitigate agency problems by their leadership styles. From an agency theory perspective, gender diverse TMTs reduce agency problems by improving the effectiveness of TMTs in organizations. 2.3 Resource dependence theory
The quality of decisions made by gender diverse groups is superior to non-gender diverse groups, because different knowledge, experiences, judgments and backgrounds make them look upon problems from different perspectives (Dallas, 2002). Rogelberg and Rumery (1996) state that a greater proportion of women are positively related to the decisions quality in TMTs. Therefore, gender diversity in TMTs improves the quality of decision-making and creates more ways to connect external environments, which brings more possibilities to firms’ development. On the basis of resource dependence theory, Hillman et al. (2007) find that firms with gender diverse senior management teams bring the benefits of communication, legitimacy and guidance. In short, according to resource dependence theory, gender diversity in TMTs create more high quality ways to connect with the external environments, which is beneficial to the development of organizations.
2.4 Human capital theory
Based on resource dependence theory, gender diversity in TMTs brings more high quality ways to connect with the external units, which also can be regarded as human capital of TMTs. Human capital theory states that accumulative stocks of personal education, experience and skills can increase personal efficiency, which is beneficial to an organization he or she works for (Pyatt and Becker, 1966). By a meta-analysis of 66 studies, Crook et al. (2011) find that there is a positive relationship between human capital and firm performance. Therefore, human capitals are positive to firm performance. The different paths of males and females lead to various levels of human capital in gender diverse TMTs, which benefit firms. Terjesen et al. (2009) indicate that different genders in leadership positions bring distinct levels of human capital to the firm. From a human capital theory perceptive, gender diversity in TMTs brings different levels of human capital to increase the performance of TMTs, which improve firm performance directly.
2.5 Upper echelons theory
This theory states that the characteristics of TMTs prefigure firm performance, strategic development, and outcomes, as the demographic and psychographic characteristics of TMTs are associated with the outcomes of an organization’s decisions and strategies (Hambrick and Mason, 1984). Based on upper echelons theory, many previous researchers use gender as a proxy to investigate the characteristics of management (Dezsö and Ross, 2012; Krishnan and Park, 2005). Post and Byron (2014) conclude that gender diversity influences firm performance because of different cognitive frames. And different cognitive frames have am impact on the characteristics of leaders. For example, the characteristics of female leaders are more willing to communicate with employees, a characteristic that fosters cooperative learning in organizations (Post, 2005; Rosener, 2011). Reger et al. (1997) and Waldman and Yammarino (1999) find that captivating leadership promotes organizational cohesion, which is beneficial to firm performance. From the perspective of upper echelons theory, the characteristics of women in TMTs are positive with regards to organizational cohesion. In brief, gender diversity affects leadership styles in TMTs, which is positively related to firm performance.
3. Hypothesis development
2On the basis of the relevant four theories mentioned above, five hypotheses are formulated in this section. The first one is the main hypotheses that assume the effect of gender diverse TMTs on firm performance. The four sub-hypotheses assume that risk taking, innovation intensity, ethical intensity, and country-level shareholder protection are four moderators on the effect of gender diverse TMTs on firm performance.
3.1 Pervious evidence about gender diversity and firm performance
Previous studies exhibit that the mix of men and women in TMTs create more profits and achieve better firm performance. Krishnan and Parsons (2008) indicate that firms achieve better financial performance with gender diversity in senior management teams, as firms with a higher proportion of female executives create higher stock returns. Erhardt et al. (2003) use 127 large companies in U.S to explore the relationship between gender diversity in TMTs and financial performance. They find that firms with a higher proportion of women in TMTs have better financial performance than firms with a lower proportion of women. A higher proportion of women are commonly given as reasons that gender diverse TMTs create higher return for companies. Welbourne et al. (2007) also find that a higher number of women in senior management teams can be considered as a positive factor to shareholder wealth. Therefore, a higher proportion of women are a mainstream reason for gender diverse TMTs create higher return for company in previous studies. Most previous literature finds that gender diversity is positively related to firm performance. However, some have come the opposite conclusions; the evidence from these studies indicate that there is a negative correlation between gender diversity and firm performance or that there is no relationship between gender diversity and firm performance (Adams and Ferreira, 2009; Rose, 2007).
According to the relevant theories mentioned above and the most previous literature, gender diversity in TMTs has an effect on firm performance but the
relationships between gender diversity in TMTs and firm performance in previous studies do not provide a clear picture. Therefore, the first hypothesis is proposed as follows,
Hypothesis 1a: There is a positive relationship between gender diverse TMTs and firm performance.
Hypothesis 1b: There is a negative relationship between gender diverse TMTs and firm performance.
The majority of previous studies indicate that there is a positive relationship between gender diversity in TMTs and firm performance (Krishnan and Parsons, 2008; Erhardt et al., 2003; Welbourne et al., 2007, Rogelberg and Rumery, 1996). However, few studies explain why gender diversity increases firm performance and the conclusions about the reasons that gender diverse TMTs is positively related to firm performance are ambiguous. For example, the study of Carter et al. (2003) shows that there is a positive relationship between the percentage of women and firm value, but they do not provide a clear explanation of how a higher number of women impact on firm value. There are few studies examining how and under what circumstances gender diverse groups have an impact on firm performance. Dwyer et al. (2003) indicate that the positive effect of gender diversity on firm performance depends upon on the organizational context, such as organizational culture and strategic objective. Smith et al. (2006) find that a higher number of female in TMTs increases firm performance, and this positive effect is dependent on the qualifications of the female. By examining U.S companies, Adams and Ferreira (2009) find that shareholder rights is a positive moderator on the negative effect of gender diversity on firm performance. The conclusion about how and under what circumstances gender diverse TMTs have an impact on firm performance is a gap in the existing literature. Therefore, This study proposes four moderators from four perspectives that may influence the effect of gender diverse TMTs on firm performance.
3.2 Risk taking
companies is a lack of capability to pay back interest on debt without stable earnings over time. Most scholars state that there is a negative relationship between business risk and firm performance. Bradley et al. (1984) explain that higher business risk increases the possibility of firm bankruptcy. Other scholars find the similar results about business risk’s negative impact on firm performance (Ferri and Jones, 1979; Friend and Lang, 1988; Marsh, 1982). However, some scholars find that there is a positive relationship between business risks and firm performance (John et al., 2008; Myers, 1977). Myers (1977) explains the reason for the positive relationship, arguing that firms with higher business risk has a lower agency cost of debt, as the impact of the debt issue on the market value is less when the firms have a higher risk in terms of its assets. Based on these arguments, it is concluded that risk has an impact on firm performance. Thereby, the extent of companies take risk is related to firm performance. Bromiley (1991) indicates that corporate risk taking is negatively related to firm future performance. By investigating a sample of Swedish small and medium-sized enterprises, Naldi et al., (2007) find the similar result that corporate risk taking is negative to firm performance. Accordingly, there is a negative relationship between risk taking and firm performance.
The levels of risk–taking are related to different human behaviors and thereby the differences between men and women lead to different risk taking behavior (Charness and Gneezy, 2009; Byrnes et al., 1999). Accordingly, gender diversity in TMTs influences the level of risk taking. Comparing the stereotypes of men and women and their attitudes about risk taking, women are not willing to take more risks. Byrnes et al. (1999) assert that women are more risk averse than men by conducing a meta-analysis. Charness and Gneezy (2009) also find the similar result that women are less willing to take risks and less competitive than men by carrying out survey-based study. Accordingly, women decrease the extent of risk taking in TMTs, which makes TMTs avoid high business in the future.
women in TMTs are unwilling to take high risks. When there are females in TMTs, the risk takings in gender diverse TMTs are lower. Therefore, females in gender diverse TMTs decrease risk taking of firms, which is positive to firm performance. It is expected that higher risk taking weakens the effect of gender diverse TMTs on firm performance. Therefore, the second hypothesis is formulated as follows,
Hypothesis 2: Risk taking is negative to the effect of gender diverse TMTs on firm performance.
3.3 Innovation intensity
Managerial effectiveness mitigates agency problems, which decreases agent cost (Fama and Jensen, 1983). Innovation is an important firm strategy that raises the value of managerial effectiveness in firms (Ginsberg, 1994; Castanias and Helfat, 2001). By examining 451 Spanish firms, Jiménez-Jiménez and Sanz-Valle (2011) find that innovation is positive to business performance. It is found that this relationship depends upon on firm age and size, industry, and the degree of environmental turbulence. Therefore, innovation a factor that is positive to firm performance.
conducive to cohesion and cooperative learning in organizations. Kanter (1983) argues that the success of innovation comes from information accumulation and alliance building. Dezsö and Ross (2012) find that innovation intensity is a moderator that strengthens the effect of female in top positions on firm performance. Therefore, the managerial behaviors of females are particularly conducive to innovation strategy in firms.
Accordingly, female leaders’ interactive managerial behaviors not only encourage information sharing but also motivate employees, and this creates more opportunities to generate creative ideas in TMTs then men in TMTs do. It is expected that innovation intensity is a factor that enhances the effect of gender diversity in TMTs on firm performance. Therefore, the third hypothesis is formulated as follows,
Hypothesis 3: Innovation intensity is positive to the effect of a gender diverse TMTs on firm performance.
3.4 Ethical intensity
Corporate ethics are defined as codes of business ethics, rules of business practices, or the responsibility of the firm to shareholders, stakeholders, and the environment (Langlois and Schlegelmilch, 1990). Corporate ethics reflect the ethical awareness and behaviors of firms, which raise firm reputations and improve customer relations (Donker et al., 2007; Luo and Bhattacharya, 2006). Therefore, companies use corporate ethics to facilitate and achieve cohesion during the process of operations (Kaptein and Wempe, 2002). Conducting a meta-analysis of 52 studies, Orlitzky et al. (2003) point out that recent studies indicate a positive relationship between corporate ethic and firm performance. Therefore, the higher ethical intensity level is, the better firm performance will be.
Mason and Mudrack, 1996). Many previous studies confirm that the attributes and behaviors of women are more ethical than men (Betz et al., 1989; Ruegger and King, 1992; Nguyen et al., 2007). Bernardi and Arnold (1997) provide evidence that in accounting firms, women have higher scores in ethical development measurement than men do. To investigate the connection between gender and ethics, Ford and Richardson (1994) review 14 studies, seven of which reveal the ethical awareness of females is higher than that of males. Collins (2000) survey 47 articles in the Journal of Business Ethics, and find that there are 32 articles that show that that women are more ethical than men are. Desvaux et al. (2007) recommend that firms have better regulations and financial performance when females participate in TMTs. Krishnan and Parsons (2008) also point out that gender diversity in TMTs improve the ethical issue in firms. Therefore, women in gender diverse TMTs increase the ethical intensity of firms, which is positive to firm performance.
Accordingly, females in gender diverse TMTs increase the ethical intensity of firms, which is positive to firm performance. It is expected that ethical intensity enhances the effect of gender diverse TMTs on firm performance. Based on these arguments, the fourth hypothesis is proposed as follows,
Hypothesis 4: Ethical intensity is positive to the effect of gender diverse TMTs on firm performance.
3.5 Shareholder protection
protection. Stronger shareholder protection increases firm value and lead to more beneficial investments (La Porta et al., 2002; Wurgler, 2000). Therefore, the strength country-level shareholder protection is positively related to firm performance.
According to agency theory, agency problems are caused by the conflicts that arise when the interests of the principal and the agent are not the same (Jensen and Meckling, 1976). When the agent does not act in the principal's interest, it increases agent costs that reduce the profits of principal (Crutchley and Hansen, 1989; Belloc, 2010). Shareholder protection decreases agency cost between the principle and the agent (La Porta et al., 2002, Lins, 2003). Wei et al (2005) indicate that agency problem in developed countries is less severe than in developing markets due to stronger shareholder protection. The minority shareholders do not have the power to control decision-making in firms (Anabtawi and Stout, 2008), whereas shareholder protection provides effective legal control that offer more rights for minority shareholders to influence the decision-making and strategies in firms. In the countries with poor shareholder protection, TMTs have more freedom to make investment decisions (Wurgler, 2000). Therefore, shareholder protection is a protection mechanism that mitigates the agency problems and offers better protection for minority shareholders to allow them discharging obligation easily (La Porta et al.,2002; Lins, 2003).
moderated by country-level shareholder protection. The fifth hypothesis is proposed as follows,
Hypothesis 5: Country-level shareholder protection is negative to the effect of gender diverse TMTs on firm performance.
4. Methodology
The methodology section includes investigation type, sample description, variables definitions, model estimations, and the process of data collection.
4.1 Panel data investigation
The research objective of this investigation is to examine the effect of gender diversity in TMTs on firm performance. The dataset used in this study consists of both cross-sectional and time series. Therefore, this study is a panel data investigation, as panel data contain multiple phenomena from different entities and different time period (Brooks, 2014).
4.2 Sample description
Internationally, the presence of females in executive positions is higher in some European countries (Smith et al., 2006). Some governments in Europe have introduced specific regulations to ensure that women can obtain the same opportunities in firms, like in Sweden and Norway (Smith et al., 2006). Previous studies only focus on companies from a single country to investigate gender diversity and firm performance, such as a couple of studies conduct in the US and Denmark (Krishnan and Parsons, 2008; Dezsö and Ross, 2012). Therefore, this study is focus on the companies from different countries in Europe to examine gender diversity and firm performance, as the culture and history in different European countries are similar in general.
companies in Europe, as only data on publicly listed companies are available from DataStream Asset 4 ESG. Due to time restrictions and data availability, the research period is from 2010 to 2015. The status of the companies is active to allow for a sufficient level of data collection during the research period. Financial institutions and insurance companies are excluded from the sample, because these financial service companies have different ways of calculating their financial ratios, so these two industries are excluded from data collection. After filtrating the data, there are 1766 European companies left that meeting all the above criteria.
4.3 Definitions of variables Dependent variable
Firm performance
Tobin (1969) defines Tobin’s q as the ratio of the total market value of a firm to its total asset. Tobin’s q emphasizes market expectation of a firm’s future performance (Demsetz and Villalonga, 2001). Following Dezsö and Ross (2012), this paper uses Tobin’s q to measure firm performance. They indicate that Tobin’s q reflects whether a firm create more market value from its assets and measures a firm's value as a whole rather than adding the amount of each part together. Accounting-based measurements provide past firm performance (Demsetz and Villalonga, 2001). Lindenberg and Ross (1981) indicate that accounting measurements may be responsible for misrepresentations in financial reporting because of different tax laws and accounting systems in different countries. The sample companies in this research come from different European countries. It is hard to compare accounting-based measurements from different accounting systems in different countries. Therefore, Tobin’s q is a better proxy to reflect firm financial performance than accounting-based measurements.
Independent variables
Gender diversity
(Oakley, 2000), thus the mix of men and women in a TMT cannot reflect the characteristics of gender diversity. In order to ensure that a TMT is a gender diverse group, women need to hold influential executive positions in this group. Therefore, a dummy variable is applied to reflect the gender diversity. The value 1 represents that women are C-suite members3 in TMTs, and otherwise the value is 0.
Moderator variables Risk taking
Risk taking for each company is measured by the standard deviation of the differences in annual earning before interest and tax (EBIT) divided by the average EBIT over the research period 2010-2015 in this study. There are various risk taking measurements for companies in previous studies, but the common point in these measurements is that firm volatility is measured some way, whether in terms assets, cash flow, or earnings, as the future performance of firm is more predictable based on stable financial figures over the years (Ferri and Jones, 1979; Bradley et al., 1984; John et al., 2008).
Innovation intensity
In this study, Product Innovation (PI) is applied to evaluate the innovation intensity. Innovation is relevant to the research and development (R&D) of a company and plays an active role in many corporate activities, for example, strategic, business decision, and organizational, etc. (Enkel et al., 2009). According to the definition of PI from DataStream Asset 4 ESG, PI examines whether or not a company supports the R&D of eco-efficient products or services by measuring the company's responsibility, commitment and effectiveness (Thomson Reuters, 2017). PI reflects the ability of a company to create business opportunities by using new technologies (Thomson Reuters, 2017). Innovation intensity is measured by the ratio of R&D expense to assets in the research of Dezsö and Ross (2012), they indicate that R&D expense is not material cost in some companies, which leads to this expense not being disclosed separately in financial statements. In order to avoid unavailable R&D ratio,
3 C-suite member refers to the most important top executive positions in a company. C-suite means the
PI is used as an alternative way to measure innovation intensity in this investigation. Higher PI means stronger innovation intensity.
Ethical intensity
Equal-weighted rating (EWR) is a proxy to measure the ethical intensity of each company in this research. EWR reveals an unbiased view of the performance of a firm in four areas: economic, social, environmental, and corporate governance (Thomson Reuters, 2017). Weaver et al. (1999) use a survey to measure the structures and activities of corporate ethics, and the survey questions include code of ethics, ethics policy distribution, etc. They find that environment and management liability are two factors that affect corporate ethics strongly. The areas of environment and corporate governance in EWR contain environment and management liability these two elements in the research of Weaver et al. (1999). According to Langlois and Schlegenlmilch (1990), corporate ethics can be defined as the codes of a firm’s ethical and business practices or its responsibility and commitment to shareholders, stakeholders, and the environment. Besides, Brunk (2010) indicates that consumers, employees, environment, communities, and the economy influence the ethical perceptions of a company. EWR discloses the performance of a firm in all the areas mentioned by Langlois and Schlegenlmilch (1990) and Brunk (2010), which are presented above. Therefore, EWR is applied to measure ethical intensity for each company. A high rating of EWR represents the good performance of a company in economic, social, environmental and corporate governance terms. Higher EWR means stronger ethics intensity.
Country-level shareholder protection
Many previous studies use the anti-self-dealing index as a proxy to measure country-level shareholder protection (Conac et al., 2007; Haidar, 2009). Anti-self-dealing index, as presented by Djankov et al. (2008), is based on the anti-director right index created by La Porta et al. (2000). The theoretical aspect of shareholder protection is the basis of the anti-self-dealing index. However, this index is based on a legal rule from 2003 and does not change over time, which is the reason that anti-self-dealing index is not applied in this research. Ballou and Pazer (1985) identify four dimensions to ensure the quality of data, which are accuracy, completeness, consistency, and timeliness. The time period in this research is 2010 to 2015 and the anti-self-dealing index is based on a legal rule from 2003, which may influence the quality of the data. The World Bank updates PMI over time, and the latest data is completed in 2016 (World Bank, 2017). Therefore, PMI scores from the World Bank are more suitable to represent country-level shareholder protection in this research.
Control variables
Table 1: Overview of variables
Variable Symbol Measurement Source
Dependent variable
Tobin’s q TQ The ratio of market capitalization to total
assets Orbis
Independent variable
Gender diversity GD Dummy variable: 1 if women are C-suite
members in TMTs, and otherwise it is 0 Orbis
Moderator variables
Risk taking RISK The standard deviation of differences in annual EBIT divided by the average EBIT during 2010 to 2015.
Datastream Innovation intensity INN The natural logarithm of product innovation Asset 4 ESG Ethical intensity ETH The natural logarithm of Equal-weighted
rating Asset 4 ESG
Shareholder protection SP Protecting minority investors World bank
Control variables
Firm age AGE The natural logarithm of the number of year
from the firm’s incorporation date Orbis
Firm size SIZE The natural logarithm of total assets of the
firm from the prior year Orbis
Leverage LEV The ratio of total debt to total equity from the
prior year Datastream
Board size BSIZE The natural logarithm of the number of people
in boardroom Asset 4 EGS
Industry IND Dummy variable: 1 if the industry of firm
belong to retail and services sector, and otherwise it is 0
Orbis Market type of the
country
TYPE Dummy variable: 1 if the country is a
developed country, and otherwise it is 0 World bank
Legal system LS Dummy variable: 1 if common-law country,
and otherwise it is 0 Orbis
4.4 Endogeneity problem
environments of female executives in TMTs. The research of Adams and Ferrier (2009) uses a fixed effects model to deal with the problem of unobservable variables. A fixed effects model assumes that unobserved variables are correlated with the independent variables (Brooks, 2014). Because of the longitudinal nature of data in this study, both entity fixed effects and time fixed effects are designed to include in all the regression analyses. An entity fixed effects model controls the differences between firms and compares the performance of each firm itself with a gender diverse TMT or without. The developments of society and economics may affect whether firms offer more opportunities for women to take executive positions, which is related to gender diversity in TMTs (Dezsö and Ross, 2012). A model controls the changes in each year and compares firm performance in each year with a gender diverse TMT or without. Hausman test is applied to test whether fixed effects model is preferred in each regression analysis. However, there is a major disadvantage of a fixed effects model, which is that it is unable to determine the impact of any variable does not change over time (Brooks, 2004). The values of dummy variables do not change over years in this study. Thus, there is a possibility that fixed effects model may not be applied.
innovation intensity and ethical intensity) are applied to deal with the problem of reverse causality (Liu et al., 2014).
4.5 Model estimations
In order to test hypothesis 1, model (1) investigates the relationship between gender diverse TMTs and firm performance.
TQ!,! = α! + β!GD!,!+ β!AGE!,!+ β!SIZE!,!+ β!LEV!,!+ β!BSIZE!,!+β!IND!,!+
β!TYPE!,!+ β!LS!,!+ µ!+ 𝜆!+ ε!,! (1) Model (2) uses the interaction between gender diverse TMTs and risk taking to test to hypothesis 2.
TQ!,! = α! + β!GD!,!+ β!RISK!,!!!+ β!GD!,!∗ RISK!,!!! + β!AGE!,!+ β!SIZE!,!+
β!LEV!,!+ β!BSIZE!,!+β!IND!,!+ β!TYPE!,!+ β!"LS!,!+ µ!+ 𝜆!+ ε!,! (2) Model (3) uses the interaction between gender diverse TMTs and innovation intensity
to test hypothesis 3.
TQ!,! = α! + β!GD!,!+ β!INN!,!!!+ β!GD!,!∗ INN!,!!!+ β!AGE!,!+ β!SIZE!,!+
β!LEV!,!+ β!BSIZE!,!+β!IND!,!+ β!TYPE!,!+ β!"LS!,!+ µ!+ 𝜆!+ ε!,! (3)
Model (4) uses the interaction between gender diverse TMTs and ethical intensity to test for hypothesis 4.
TQ!,! = α! + β!GD!,!+ β!ETH!,!!!+ β!GD!,!∗ ETH!,!!!+ β!AGE!,!+ β!SIZE!,!+
β!LEV!,!+ β!BSIZE!,!+β!IND!,!+ β!TYPE!,!+ β!"LS!,!+ µ!+ 𝜆!+ ε!,! (4) Model (5) uses the interaction between gender diverse TMTs and country-level
shareholder protection to test hypothesis 5.
TQ!,! = α! + β!GD!,!+ β!SP!,!+ β!GD!,!∗ SP!,!+ β!AGE!,!+ β!SIZE!,!+ β!LEV!,!+
β!BSIZE!,!+ + β!IND!,!+ β!TYPE!,!+ β!"LS!,!+ µ!+ 𝜆!+ ε!,! (5)
where i refers to the firm, and t refers to year. TQ!,! refers to the dependent variable Tobin’s q. GD!,! refers to the independent variable gender diversity. RISK!,!!! refers
to the firm from the prior year. INN!,!!! refers to innovation intention from the prior
ETH!,!!! refers to the interaction between gender diversity and ethical intensity from the prior year. GD!,!∗ SP!,! refers to the interaction between gender diversity and shareholder protection. AGE!,! refers to firm age. SIZE!,! refers to firm size. LEV!,! refers to leverage. BSIZE!,! refers to boardroom size. RISK!,! refers to the firm risk taking. IND!,! refers to the industry a firm belong to. TYPE!,! refers to the market
type of the country. LS!,! refers to the legel system of a country. 𝛼 refers to
constants. 𝛽 refers to the parameters of the coefficients. 𝜇! refers to entity fixed
effects. 𝜆! refers to time fixed effects. ε!,! refers to an error term. 4.6 Data selection process
from 18 European countries over the research period from 2010 to 2015. Table 2: Sample distribution by country
Country Number of companies % Country Number of companies % Austria 2 1.08% Luxembourg 5 2.69% Belgium 8 4.30% Netherlands 11 5.91% Denmark 7 3.76% Norway 4 2.15% Finland 8 4.30% Poland 5 2.69%
France 35 18.82% Russian Federation 5 2.69%
Germany 12 6.45% Sweden 18 9.68%
Greece 1 0.54% Switzerland 7 3.76%
Ireland 10 5.38% Turkey 2 1.08%
Italy 4 2.15% United Kingdom 42 22.58%
Note: There are 15 developed market countries and 3 developing markets countries in this study
Table 3: Sample distribution by industry
Industry Number of
companies %
Mining and quarrying 9 4.84%
Manufacturing 78 41.94%
Electricity, gas, steam and air conditioning supply 10 5.38%
Water supply; sewerage, waste management and remediation activities 4 2.15%
Construction 5 2.69%
Wholesale and retail trade* 15 8.06%
Transportation and storage 11 5.91%
Accommodation and food service activities* 4 2.15%
Information and communication* 21 11.29%
Real estate activities 10 5.38%
Professional, scientific and technical activities 9 4.84%
Administrative and support service activities* 5 2.69%
Other service activities* 5 2.69%
5. Result
5.1 Descriptive statisticsTable 4: Descriptive statistics for variables
Mean Median Max Mini SD Observations Dependent variable Tobin’s q 1.13 0.73 8.89 0.09 1.29 1060 Independent variable Gender diversity 0.74 1 1 0 0.44 1116 Moderator variables Risk taking 0.92 0.38 51.15 -27.86 7.04 1050 Innovation intensity (ln) 4.04 4.37 4.58 2.68 0.62 1029 Ethical intensity (ln) 4.16 4.40 4.57 1.65 0.59 1029 Shareholder protection 6.67 6.50 7.80 4.50 0.87 1116 Control variables Firm age (ln) 3.70 3.83 5.59 0.7 0.97 1092 Firm size (ln) 8.77 8.67 12.29 4.8 1.44 1080 Leverage 0.85 0.61 7.00 -5.1 1.30 1108 Board size (ln) 2.36 2.40 3.09 1.6 0.33 1045 Industry 0.24 0 1 0 0.43 1116 Type of country 0.94 1 1 0 0.24 1116 Legal system 0.28 0 1 0 0.45 1116
Note: Table 4 presents the mean, median, standard deviation and the number of observations for each variable of 187 large European companies from 2010 to 2015. The definition of each variable is
presented in Table 1. All firm-level variables are winsorized at 1st and 99th percentiles.
All the correlations between the variables in Table 5 are below 0.7. According to Brooks (2012), no multicollinearity problems exist in this study.
5.2 Base analysis of regression results
Table 6: Gender diversity TMTs and firm performance
Tobin’s q 1 2 Constant 3.0361*** 3.0984*** [0.3161] [0.3134] Gender diversity -0.3719*** [0.0835] Firm age 0.0335 0.0292 [0.0366] [0.0362] Firm size -0.3314*** -0.3158*** [0.0302] [0.0302] Leverage -0.1518*** -0.1512*** [0.0271] [0.0268] Board size 0.1833 0.1763 [0.1324] [0.1312] Industry -0.0784 -0.0494 [0.0836] [0.0830] Market type 0.4705*** 0.5793*** [0.1566] [0.1571] Legal system 0.4897*** 0.4978*** [0.0822] [0.0814]
Firm fixed effects No No
Year fixed effects Yes Yes
𝑅! 0.2304 0.2456
Adjusted 𝑅! 0.2209 0.2356
Firms 178 178
Observations 993 993
Note: *** indicates statistically significant at the 1% level, ** indicates statistically significant at the 5% level and * indicates statistically significant at the 10% level. Standard errors are reported under each coefficient. The definition of each variable is presented in Table 1. The result of Hausman test for each model is presented in Appendix B, which indicates that a fixed effects model is preferred. The values of dummy variables that are the same in all years for each firm, so an entity fixed effects model is not able to be estimated.
Hypothesis 1 predicts the effect of gender diverse TMTs on firm performance. The results in column 2 shows that gender diversity is negative and highly significant in terms of Tobin’s q at the statistical significant levels 1%, which strongly supports hypothesis 1b. This result is in line with the previous literature that gender diverse TMTs have a negative impact on firm performance (Adams and Ferreira, 2009). From an economic perspective, the negative coefficient of gender diversity means that, ceteris paribus, Tobin’s q is around 37.19% lower with gender diverse TMTs than without.
Table 7: Four moderators on the effect of gender diversity TMTs on firm performance
Tobin’s q 1 2 3 4 Constant 3.1415*** 2.6951*** 2.7737*** -1.4493*** [0.3269] [0.5070] [0.4592] [0.6815] Gender diversity -0.3831*** -0.1392 -0.2907 4.7344*** [0.0871] [0.5210] [0.5207] [0.6559]
Gender diversity*Risk taking 0.0019
[0.0109]
Gender diversity*Innovation intensity -0.0601
[0.1283]
Gender diversity*Ethical intensity -0.0243
[0.1254]
Gender diversity*Shareholder protection -0.7669***
[0.0868] [0.0863] [0.0851] [0.0807]
Market type 0.5834*** 0.5212*** 0.4638*** 0.4491***
[0.1648] [0.1706] [0.1735] [0.1532]
Legal system 0.5081*** 0.5066*** 0.4692*** 0.3636***
[0.0866] [0.0832] [0.0838] [0.1070]
Firm fixed effects No No No No
Year fixed effects Yes Yes Yes Yes
𝑅! 0.2372 0.2505 0.2531 0.2924
Adjusted 𝑅! 0.2251 0.2387 0.2413 0.2815
Firms 168 178 178 178
Observations 958 967 967 993
Note: *** indicates statistically significant at the 1% level, ** indicates statistically significant at the 5% level and * indicates statistically significant at the 10% level. Standard errors are reported under each coefficient. The definition of each variable is presented in Table 1. The result of Hausman test for each model is presented in Appendix B, which indicates that a fixed effects model is preferred. The values of dummy variables that are the same in all years for each firm, so an entity fixed effects model is not able to be estimated.
Table 7 presents the results of risk taking, innovation intensity, ethical intensity and country-level shareholder protection on the effect of gender diversity in TMTs on Tobin’s q in each column representatively.
Hypothesis 2 assumes that risk taking is negative to the effect of gender diverse TMTs on firm performance. The result in column 1 shows that risk taking on the effect of gender diversity on Tobin’s q is not significant at any statistical significant level, which means that there is no evidence to support hypothesis 2. Insignificant result may be due to the small size of company samples in this study.
Hypothesis 3 examines that the effect of gender diverse TMTs on firm performance is positively moderated by innovation intensity. The result of innovation intensity on the effect of gender diversity on Tobin’s q is insignificant at any statistical significant level in column 2. The insignificant result may be due to the characteristics of the majority industry in the dataset. Approximately 42% of the companies belong to the manufacturing industry in this investigation, and innovation may not be the main firm strategy for these companies. Small size of company samples may also be the reason for the insignificant result.
TMTs on firm performance. Column 3 in Table 7 that shows the result of ethical intensity on the effect of gender diversity on Tobin’s q is insignificant at any statistical significance level. Most company samples come from developed markets in this study, and the small number of companies from developing markets may be related to the insignificant result, as many companies do have ESG scores in developing markets.
Hypothesis 5 assumes that country-level shareholder protection is negative to the effect of gender diverse TMTs on firm performance. The result in column 4 shows that the coefficient on the interaction between gender diversity and country-level shareholder protection is negative in terms of Tobin’s q at the statistically significant levels of 1%, which strongly supports hypothesis 5. When shareholder protection increases by 1 unit, the effect of gender diversity on Tobin’s decreases by 76.67%. Thus, the stronger is the protection of shareholder in a country, the less is the effect of gender diversity in TMTs on firm performance.
5.3 Robustness test
The robustness test indicates the reliability of the results above, and it uses the same analytical method under different conditions to check whether the results remain the same as before (Heyden et al., 2001). In the base analysis, Tobin’s q is the measurement to reflect firm financial performance in the base analysis, and it focuses on market expectation. Accounting-based measurement reflects past firm performance, which is applied to reflect firm financial performance in robustness test. The profitability ratio gross profit margin (gross profit to net sales) is applied to measure firm performance to test the significant result of hypothesis 1 and hypothesis 5. The analysis in Table 8 repeats the same models used in the base analysis.
Table 8: Gender diversity in TMTs and accounting-base measure of firm performance
Gross profit margin
Gender diversity -0.042***
[0.017]
Gender diversity*Shareholder protection -0.0253
[0.0212]
level and * indicates statistically significant at the 10% level. Standard errors are reported under each coefficient. Descriptive statistic and correlations matrix are presented in Appendix C and D. The whole table of robustness test results is presented in Appendix E.
The results in Table 8 show that gender diversity is negatively significant to firm performance, which in line with the result of hypothesis 1b in the base analysis. The negative coefficient of gender diversify indicates that gender diversity is negative to gross profits margin. When gender diversity increases by 1 unit, gross profits margin decreases by 4.2%. Therefore, gender diversity in TMTs is also reflected in the accounting-base data of firms. The result of interaction between gender diversity and shareholder protection is insignificant at any statistical significant level.
6. Conclusion
Most previous studies confirm that gender diversity in TMTs has an impact on firm performance. However, few studies explain how and under what circumstances gender diverse TMTs affect firm performance. In order to fill this literature gap, a theoretical model is built to answer the research questions. This study examines the effect of gender diverse TMTs on firm performance from four perspectives, which are financial perspective, firm strategy, corporate governance, and international perspective. Correspondingly, risk taking, innovation intensity, ethical intensity and shareholder protection are proposed as four moderators that may influence the effect of gender diverse TMTs on firm performance.
The results of hypothesis 1 and hypothesis 5 are highly significant. The result of Hypothesis 1 indicates that gender diversity in TMTs has a negative impact on firm performance. This finding is in line with the result of Adams and Ferreira (2009), who find that the average effect of gender diversity is negative to firm performance. Therefore, gender diversity in TMTs is negative to firm performance Tobin’s q. The result of hypothesis 5 indicates that shareholder protection is negative to the effect of gender diversity in TMTs on firm performance. Stronger country-level shareholder protection is negatively related to the effect of gender diverse TMTs on a firm, as stronger shareholder protection provides better legal control to minority shareholders, which limits the power of gender diverse TMTs. The results of the remaining hypotheses are insignificant. Therefore, there is no evidence to support that risk taking, innovation intensity and ethical intensity have an impact on the performance of gender diverse TMTs in a firm respectively. From the industry level, the majority of the sample companies belong to manufacturing industry, and thereby innovation may not be the core firm strategy for these companies, which may explain the insignificant results in terms of innovation intensity. At the country level, companies come from developed markets have high EGS scores and fewer companies from developing markets have similar scores in this investigation, there are 83% countries come from developed markets with EGS sores in this study, which may be the reason for the insignificant results of ethical intensity. The quantity and diverse sources of data may also cause the insignificant results.
Furthermore, the results of the robustness test confirm that gender diversity in TMTs has a negative impact on firm performance. Finally, there are several conclusions for control variables. Firm size and leverage are negative to Tobin’s q. Developing market are positively related to both Tobin’s q and gross profit margin. The common-law legal system is positive with regards to Tobin’s q, whereas it is negatively related to gross profit margin.
period in the research of Dezsö and Ross (2012), the sample size is relatively small in this investigation, and the observation period is relatively short, which may affect the significance level of the statistical accuracy of the results. Future research could extend the observation period and increase the number of company samples. The second limitation is that this paper only focuses on large publicly listed companies in Europe, which means that the findings are not suitable for non-publicly listed small and medium-sized companies outside of these 18 European countries. Future research could include non-publicly listed companies and more regions. The third limitation is sample distribution. The insufficient quantity of countries and industries cannot represent the entirety of the circumstances in Europe. The distribution of countries and industries is not even, which may impact the results. The fourth limitation is data availability, the information about gender diverse TMTs are not always available in databeases directly. Besides, most companies in developing countries have limited published data in Datastream Asset 4 ESG database, which leads to removing most of companies from developing countries in the dataset. The last limitation is that this study is focused on the impacts of the country-level and the firm-level, which ignore the influence of individual background of each member in gender diverse TMTs, such as, marital status, nationality, age and etc. The impact on the individual level could be an interesting topic related to gender diversity in TMTs in the future research studies. By exploring the relationship between gender diverse TMTs and firm performance, and how and under what circumstances gender diverse TMTs have impacts on firm performance, the findings of this paper not only contributes to addressing the previous gap in the literature, by extending the understanding of gender diversity on firm performance, but the findings also offer some managerial suggestions to companies in countries with stronger shareholder protection to manage relationship between gender diverse TMTs and minority shareholders. Thus, these contributions can be divided into two parts.
gap in the existing literature by using a theoretical model to arrive at the findings. The result indicates that shareholder protection is a negative moderator between gender diverse TMTs and firm performance. Therefore, in a county with stronger shareholder protection, the effect of gender diverse TMTs on firm performance is less.
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