Master Thesis
University of Groningen, Faculty of Economics and Business
The effect of board diversity on corporate social disclosure: an analysis of family-owned business
Name: Dorine Volgers Student number: S2572745 Study Programme: MSc IFM
Supervisor: Dr. R.O.S. Zaal Co-Assessor: Dr. Wolfgang Bessler
Date: 06-06-2019 Abstract
This paper discusses the relation between board diversity and Corporate Social Disclosure (CSD). A new light is shed on the effect family firms (FF), and the country-specific variable control of corruption (Coc) has on this connection for the period of 2010-2014. This paper finds there is a positive effect of board diversity on CSD. However, family firms incorporated less CSD compared to non-family firms, but there is no significant difference in CSD across family firms based on board diversity. Control of corruption does not have an significant effect on CSD. However, the effect of board diversity in high Coc countries is positively associated with CSD.
Keywords: Corporate social disclosure, board diversity, family firms, non-family firms,
1.Introduction ... 3
2. Literature Review ... 6
2.1 Board diversity ... 6
2.2 Corporate social disclosure ... 7
2.2.1 Stakeholder theory ... 7
2.2.2 Legitimacy theory ... 8
2.3 Family firms ... 9
2.4 Corruption ... 11
3. Methodology ... 13
3.1 Data collection ... 13
3.2 Dependent variable ... 14
3.3 Independent variables ... 15
3.4 Control variables ... 17
3.5 Regression models ... 19
3.6 Endogeneity ... 20
4. Results ... 21
4.1 Descriptive statistics ... 21
4.2 Correlation analysis ... 24
4.3 Empirical results ... 25
4.4 Endogeneity problem ... 29
4.5 Robustness Check ... 31
5. Conclusion and Discussion ... 33
5.1 Limitations ... 34
6. Appendix ... 35
1.Introduction
In the current academic literature, diversity of boards is a hot topic. Multiple studies research the effect of board diversity on firm performance (Adams and Ferreira, 2009; Farrel and Hersch, 2005). Yet, if you read the newspapers, the social responsibility of firms is another vast subject. The plastic soup of Boyan Slat is a project which almost everyone in the world knows. Another example is Procter and Gamble, this year, they announced that they made recycled bottles from the beach plastic, to eliminate the idea of waste (P&G News1). This is just one example of a company who feels socially responsible for the environment. There are also examples of companies who feel accountable for the community in which they operate. Take Vodafone, who encourage disadvantaged young people in their community to achieve their goals2 (Vodafone, A review of corporate responsibility). Almost every company knows
its responsibility to engage in social projects. The Economist said ‘Corporate social
responsibility, once a do-gooding sideshow, is now seen as mainstream’. In this thesis, the research is not about Corporate Social Responsibility (CSR), but Corporate Social Disclosure (CSD). This is due to the fact that the disclosure of sustainable information is the most used way for companies to appear to be socially responsible (Archel, 2003). The definition of CSD is the information given by the company to the public regarding a company’s activities that relate to society (Mia and Al-Mamum, 2011). Disclosure of information differs across firms. Country-level and firm-level characteristics are of influence on the amount of CSD.
Within the rise of adding more CSD in the firm objectives, the increase of female board members occurred. Several countries implemented a mandatory percentage of female
directors. For example, Norway obliged firms to reserve at least 40 percent of their director’s
1
https://news.pg.com/press-release/pg-corporate-announcements/herbal-essences-and-terracycle-create-brands-first-ever-bea
seats to women (Hoel, 2008). In 2010 8.1% of the total directors in the Netherlands consisted of females, whereas this percentage is grown to 15% in 2014 (Luckerath-Rovers, 2010 and 2014). Woman compared to men take a different side in board room debates on the impact of CSR. It is proven that diversity in the board of directors influences firm performance (Adams and Ferreira, 2009). As stated before, previous literature has focused a lot on board diversity and financial performance, however how does the relationship between board diversity and CSD evolve. Siciliana (1996) stated that board diversity, measured as the percentage of woman on the board, is associated with higher levels of corporate social reporting. This relationship is tested in this research.
The main goal of companies is to create profit. Why should they engage in social and environmental issues, which only costs money at the expense of the shareholder? In a broad sense, there are two categories of firms: family firms and non-family firms. Some family firms find it essential to have a good image and probably engage a lot in CSD (Anderson and Reeb, 2003), however other family firms focus primarily on their profitability and think that sharing valuable information only can hurt their brand image (Burak & Morante, 2007) The ultimate goal of the firm is to obtain recognition and support from their share- and stakeholders. How can they transfer the ‘good behavior’ information to them?
To engage in social or environmental ‘good behavior’ a firm would evaluate the gains and losses to implement CSD. Therefore, the country characteristics are of importance on the amount of CSD. The corruption level of the country matters for the amount of CSD, because in corrupt countries, there is an option to bribe government officials in return for media
corruption, and family firms have on the central relationship between board diversity and corporate social disclosure.
Research Question ‘What is the effect of family firms and corruption on the relationship between board diversity and corporate social disclosure?’
The remaining of this paper is organized in the following sections. In section two, the literature on this topic and the hypotheses of this research are discussed. Section three
2. Literature Review
2.1 Board diversity
The members in the board of directors are one of the most important persons, because they make the final strategic decision, which has a direct effect on the performance and reporting practices of a firm (Marimuthu and Kolandaisamy, 2009). Kang, Cheng, and Grey (2007) defined board diversity as the variation in the composition of the board of directors. This diversity can be defined by two common distinctions, namely the direct observable ones (nationality, gender, and ethnic background) and the less obvious ones (educational and occupational background). This research will focus on the direct observables one, gender. This is due to the fact that this research applies to many countries in the world, and
educational levels and occupational background differs in these countries. There is already a long-lasting debate about the competitive benefits that can be enjoyed by companies that have women on boards of directors (Mahadeo, Soobaroyen, and Hanuma; 2011). Carter, Simkins, and Simpson (2003) state that homogeneity at the top results in a narrow perspective while diverse senior managers take a broader view. On the other hand, competitive benefits can also be enjoyed by differences in the ethnic background (Kang et al., 2007). The difference
between men and woman will affect the decision-making process, because woman especially focuses on innovations, social skills, and community interests. Moreover, women are less likely to have attendance problems than men. Consequently, more woman on the board also increases the attendance behavior of the male directors (Adams and Ferreira; 2009). More differences appear if there are woman on the board: Woman tend to have a refreshing view on issues that need more attention and fulfill their roles in a more serious manner (Singh,
dangers to survival. Farrell and Hersch (2005) find that women tend to serve on better
performing boards. Previous studies mostly find a positive relationship between women in the boardroom and social performance (Boulouta 2013; Williams 2003) or social disclosure (Galbreath, 2011). Boulata (2013) states that woman directors are more oriented to fulfill the organization’s social mission. Hafsi and Turgut (2013) find that diversity in the boards significantly and positively associates with social performance.
2.2 Corporate social disclosure
Firms adapt CSD strategies in their firm for several reasons. This research explains two theories: Legitimacy theory and Stakeholder theory.
2.2.1 Stakeholder theory
According to the stakeholder theory, a firm and its management should behave in a way that is important to their stakeholders (An et al., 2011). A stakeholder is any group or individual who is affected by the achievement of the companies objectives (Freeman,1984, p46). Some stakeholders desire the management to engage in CSD. The company not only has to
undertake these actions, but also involve their activities in a report. The organization should be accountable for their actions, and this can be achieved with the disclosure of the
information. Firms can voluntarily disclose this information to serve the need of stakeholders. It also makes a firm more transparent if they disclose this information. According to the stakeholder perspective, CSD reporting is viewed as part of the dialogue between the firm and its stakeholders, while CSD is considered a relatively successful means of negotiating
2.2.2 Legitimacy theory
The second reason to engage in CSD is that the firm wants ‘to do good’. They have an intention to help the society without having ulterior purposes (Branco and Rodriquez, 2006). A firm seeks to legitimize its actions of the firm. Legitimacy is defined as
a “generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and
definitions.” (Suchman, 1995). CSD reporting reflects the changing business environment to respond to broader stakeholders concerns and institutional fundamentals (Young and Marais 2011). It is known that organizations who are environmental unfriendly disclose more information about their environmental performance than environmentally friendly firms (Cormier et al., 2011).
Board diversity is the first link to the external environment (Hafsi and Targut, 2013).
Diversity among directors in a firm is a necessary resource for a firm to realize and respond to the impact of its activities on the environment (Boyd 1990). That realization can assist the firm in addressing CSD issues and adopting appropriate disclosure practices. Siciliana (1996) stated that board diversity, measured as the percentage of woman on the board, is associated with higher levels of corporate social reporting. In line with prior findings, Ibrahim and Angelidis (1993) found that woman on the board have a positive effect on the orientation of corporate social reporting. Furthermore, Pfeffer (1972) said that successful organizations tend to have the same characteristics as the environmental and social demands. This research argues that diversity on boards leads to better CSD relevant to stakeholders. Moreover, I expect that woman directors have a positive influence on CSD because they are more related to empathic concerns (Ibrahim and Angelidis, 1993).
2.3 Family firms
Family firms have a specific type of ownership structure and concentration. A difference is made between the comprehensive definition of family firms and a more precise definition in which the family owns a fraction of the company. For example, Anderson and Reeb (2003) define corporations as a family firm if there exists equity ownership of the founding family, one of the family members serves on the board of directors or when a member or descendant of the founding family serves as CEO in the past decade. Other papers refer to family firms when several family members are involved in owning or managing the family business, and over time there should be involvement by multiple members of the same founding family (Perez- Gonzalez, 2006). Also, corporations in which a by blood or marriage related founder or owner of the family firm serves as the CEO can be seen as a family firm, according to Claessens et al. (2002). Villalonga and Amit (2004) examine a wide variety of definitions, encompassing different levels and generations of individual- or family-ownership and
management. Literature also shows a great variety of ownership fractions used as a threshold for family firms. Villalonga and Amit (2006) argue that a corporation is family owned when the founder or a member of the family is officer, director, or owns 5% of the firm's equity. Barontini and Caprio (2006) and Maury (2006) state that a firm must be considered as a family firm when the family possesses 10% or more of the ultimate voting rights. Firms are family controlled when the direct and indirect voting rights exceed 20% (La Porta, Lopez-de-Silanes, and Shleifer, 1999) Similar, Faccio and Lang (2002) consider family firms as
Most of the time family owners are more focused about the profitability they make than the social and environmental issues (Burak and Morante, 2007). Furthermore, usually family members have significant investments of their own incorporated in the business and want the highest possible return for this investment (Deniz and Cabrera, 2005). Also, responsible community actions can pose a risk on the reliable financial performance of the firm (Virakul Koonmee and McLean, 2009). Family firms do not think that CSR practices generate competitive benefits, although some assume that they have the assets to carry them out. Therefore, family firms view these practices as a cost and not as an opportunity (Déniz and Cabrera, 2005).
Furthermore, family businesses tend to be less socially responsible than non-family firms. This is due to the fact they are likely to disclose comparable information on CSR practices to a lesser extent to avoid costs from the use of this information by users (personnel,
competitors, etc.) that may damage the image of the company, creating important competitive disadvantages (Elliott and Jacobson, 1994). Moreover, family members tend to be more involved in the daily operations of the firm, generating more information, and controlling the rest of the staff (Chau and Gray, 2002). This results in less information asymmetry. The demand to include additional disclosure than necessary from family-owned firms is less than from non-family companies. Family firms do not have the motivation to add this other disclosure (Chau and Grey, 2002). Therefore, voluntary information disclosures such as reporting on CSR practices may not be necessary.
H2a: The relationship between board diversity and corporate disclosure will be weaker for family firms than for non-family firms
and Trombetta (2007) showed that companies with better annual report disclosure are more likely to be listed in reputation score lists. Family firms tend to have a longer maturity than non-family firms. (Anderson and Reeb, 2003) To create opportunities for future family generations to ensure the survival of the firm and gain a positive image in the market, family firms may carry out actions accepted by society, to cover stakeholders’ demands.
Furthermore, investments in CSR tend to be long term (Johnson & Greening, 1999) and consist of sustainable items to survive in the future (Oh, Chang and Martynov, 2011). Large shareholders are likely to be in favor of such investments. Moreover, owning a
company perceived as “socially not accepted” may entail enormous costs (Barnea and Rubin, 2010), which is another reason why large shareholders are likely to be concerned about the firm’s social responsibility reputation and CSR disclosure. According to these theories, social disclosure is used to maintain a company’s reputation and identity (Hooghiemstra, 2000). However, the disclosure phenomenon is a complicated theory, whereby a single method cannot explain why corporations show this to their stakeholders or employees (Cormier et al., 2005)
H2b: The relationship between board diversity and corporate disclosure will be stronger for family firms than for non-family firms
2.4 Corruption
As stated before, country-level characteristics are of influence on the amount of CSD. In this research, corruption is the measurement of the differences between the countries. The
definition of corruption, stated by the world data bank3, is the misuse of public office for private gain, including both petty and grand forms of corruption, as well as "capture" of the
3https://tcdata360.worldbank.org/indicators/hc153e067?country=BRA&indicator=364&viz=line_chart&years=1
state by elites and individual interests. An example of petty corruption is bribery or asset stripping; an example of grand forms of corruption is illicit influence over legislation or policy (O’ Donnel, 2006). It is generally accepted that growing perceptions of corruption diminish trust in public institutions (Rose-Ackerman,2001). A relationship between the government and a firm is mostly dominated by the government, because they have the power to allocate the social resources (Xu, Chen, and Qiao, 2017). The company can obtain special treatment in the form of tax subsidies, media propaganda, etc., which makes it easier for a firm to survive in their business, if they compensate the government officials for their special treatment (Zimmerman and Zeitz, 2002). Another reason for firms to pay bribes in hopes of obtaining a business advantage is greater efficiency, or access to relationships or markets (Nichols, 2012). This option depends on the country where the firm is positioned. A solution to increase the legitimacy of the firm is to gain a positive response from society (Zimmerman and Zeitz, 2002). CSD is a compliance statement by the firm to show society what kind of good actions they undertake. All the negotiations on bribery affect the budget of the company. It is said that firms who need to spend a part of their budget in a corrupt act, will not able to comply with the social project or even environmental protection systems. (Nichols, 2012). This means that exactly in those countries where large companies should implement more social programs they may not be able to implement this, since their budgets are used for ‘other’ payments (Nichols, 2012). Corruption makes it impossible for companies to find the basic condition to comply with their CSD option, therefore, in countries with higher
corruption, it is more complex to involve in CSD.
3. Methodology
3.1 Data collection
3.2 Dependent variable
The dependent variable corporate disclosure is an index of the commitment of a firm to this disclosure. It contains four elements, namely CSR Sustainability Reporting, CSR
Sustainability Index, CSR Sustainability Committee, and CSR Global Activities. The CSR report is the main channel for communicating companies’ social and environmental impacts (Hogner, 1982). Table 1 shows the criteria for this variable.
Table 1. Explanation Dependent Variable
CSR Sustainability reporting
Does the company publish a separate sustainability report or publish a section in its annual report on sustainability?
CSR Sustainability Index
Does the company report on belonging to a specific sustainability index?
CSR Sustainability Committee
Does the company has a separate sustainability committee?
CSR Global Activities
Does the company's sustainability report take into account the global activities of the company?
Table 2. Frequencies Corporate Social Disclosure CSD Frequencies Percentage 0 4 0.05 1 193 2.58 2 1362 18.23 3 3173 42.46 4 2741 36.68 Total 7473 100.00 3.3 Independent variables
From the dataset, I defined family firms if the variable NOSHEM4 is greater than zero. This
variables measure the outstanding shares by family members. Concretely, we considered family ownership by using the dummy variable Family firms, which takes the value 1 when a company is considered to be a family firm and 0 otherwise. There is no direct definition of a family firm, but we take the strategic firm measurement. Table 2 shows the distribution of family firms by years. About 17% of the firms are family firms. This variable is dichotomous, because it only can obtain two values.
4 definition of NOSHEM: aggregates holdings by family owners and firm employees under the same variable
Table 3. Distribution of family firms 2010 2011 2012 2013 2014 Total Non-family firm 1244 1216 1193 1269 1277 6199 Family Firm 254 266 252 252 250 1274 Total 1498 1482 1445 1521 1527 7473
Another independent variable is board gender diversity. Literature uses several measurements, but according to Adams and Ferreira (2009), the proportion of female on the board is a correct measurement for this variable. Therefore I used the board diversity measurement, which shows the proportion of woman directors on the board.
From the World databank, I obtained the measurement for Control of Corruption (Coc). This measure reflects the perception of the extent to which public power is exercised for private gain. The country estimate scores on Control of Corruption are scaled from -2.5 to 2.5. Higher ratings indicate lower perceived corruption. It is developed from survey institutes,
3.4 Control variables
This study also controls for other factors, which may affect the relationship between board diversity and CSD. This is due to the fact that this research does not want biased results. The following control variables are taken into account: board size (BS), firms size (FS),
profitability (ROA and MTBV), and leverage (LEV).
The first control variable that this thesis takes into account is board size (BS), calculated as the total number of directors on the boards. This research expects a positive relationship between corporate social disclosure and the number of directors on the board, because a large board probably have more different characteristics in their team. These different knowledge and skills help the company to secure critical resources (Dalton, Daily, Johnson, and
Ellstrand, 1999). Campbell and Minquez-Vera (2008) said that larger boards automatically have more women on the board of directors.
The second control variable taken into account is firm size (FS). According to Clarkson (1995), larger boards appear to increase their corporate social disclosure. Larger boards have more effective external links and can connect the firm better to its environment (Pfeffer, 1973). Moreover, larger firms have the resources and knowledge to protect them for
environmental disturbances. Therefore, we control for firm size in this research. Thirdly, this paper includes return on assets (ROA), defined as operating income in million dollars dived by total asset in million dollars, as a control measure of firm operating performance. The expectation is that ROA is positively related to CSD, because in periods of low profitability economic demands tend to take priority over the CSD (Cormier and Magnan, 1999). In contrast, in high profitability economic demands there is more room for CSD.
Lastly, leverage is added as a control variable. Jensen and Mecking (1976) said that more highly levered firms disclosure voluntary information to decrease their agency costs. Brammer and Pavelin (2008) argue that low leverage results in less stakeholder pressure to give information on CSR activities, thus high leverage will result in high stakeholder pressure. The more a company relies on external funding, the more the management must respond to the creditor's expectations on CSD. Purushothaman et al. (2000) predict a negative
relationship between leverage and CSD, because their relationship can be tight. They think a company uses other manners to inform their external creditors about their social responsibility information. Leverage is calculated by dividing long term debt by assets.
Table 4. Variable description
Variable Description
Dependent Variable
CSD Measurement from 0 to 4
Independent Variables
BOARDDIV The percentage share of women on board of
directors
FF Dummy variable assigning 1 if NOSHEM5
is above 0.
Coc Perceptions of the extent to which public
power is exercised for private gain, between -2.5 and 2.5.
Control variables
BS Total number of directors sitting on a board
LEV Measured as long term debt to total assets
FS Firm size Log (total assets)
ROA Operating income in million dollars dived by
total asset in million dollars
MTBV Market value divided by the book value
This table summarizes the definitions of the variables used throughout this research.
3.5 Regression models
Based on our first hypotheses, the following model is proposed.
H1: 𝐶𝑆𝐷𝑖𝑡 = 𝛼 + 𝛽1𝐵𝑂𝐴𝑅𝐷𝐷𝐼𝑉𝑖𝑡+ 𝛽2𝐹𝐹𝑖𝑡+ 𝛽3𝐵𝑆𝑖𝑡+ 𝛽4𝐿𝐸𝑉𝑖𝑡+ 𝛽5𝐹𝑆𝑖𝑡+ 𝛽6𝑅𝑂𝐴𝑖𝑡+ 𝛽7𝑀𝑇𝐵𝑉𝑖𝑡+ 𝛽8𝐶𝑜𝐶𝑘+ 𝛽9𝐶𝑂𝑈𝑁𝑇𝑅𝑌 𝐹𝐼𝑋𝐸𝐷 𝐸𝐹𝐹𝐸𝐶𝑇𝑆𝑘+
𝛽10𝑌𝐸𝐴𝑅 𝐹𝐼𝑋𝐸𝐷 𝐸𝐹𝐹𝐸𝐶𝑇𝑆𝑡+ 𝛽11 𝐼𝑁𝐷𝑈𝑆𝑇𝑅𝑌 𝐹𝐼𝑋𝐸𝐷 𝐸𝐹𝐹𝐸𝐶𝑇𝑆𝐼+ 𝐸𝑟𝑟𝑜𝑟𝑖𝑡
In this model, i indicates firms, k indicates country and t refers to the time period, β are the parameters to be estimated. As said previously, the CSD is the dependent variable that takes a value between 0 and 4 according to the amount of CSD shown by the companies.
In the second equation, the interaction effect (BOARDDIV*FF) is added. This interaction effect examines the effect of family firms with high board diversity on the relationship between gender diversity and CSD. To control for heteroscedasticity, which refers to the
behavior and characteristics of firms that are hard to measure, all the regression models include robust standard errors. If this research does not include these errors in the equation, the results could be biased.
𝐻2: 𝐶𝑆𝐷𝑖𝑡 = 𝛼 + 𝛽1𝐵𝑂𝐴𝑅𝐷𝐷𝐼𝑉𝑖𝑡+ 𝛽2𝐹𝐹𝑖𝑡+ 𝛽3𝐵𝑂𝐴𝑅𝐷𝐷𝐼𝑉𝑖𝑡∗ 𝐹𝐹𝑖𝑡+ 𝛽4𝐵𝑆𝑖𝑡
+ 𝛽5𝐿𝐸𝑉𝑖𝑡 + 𝛽6𝐹𝑆𝑖𝑡+ 𝛽7𝑅𝑂𝐴𝑖𝑡+ 𝛽8𝑀𝑇𝐵𝑉𝑖𝑡+ 𝛽9𝐶𝑜𝐶𝑘
+ 𝛽10𝐶𝑂𝑈𝑁𝑇𝑅𝑌 𝐹𝐼𝑋𝐸𝐷 𝐸𝐹𝐹𝐸𝐶𝑇𝑆𝑘+ 𝛽11𝑌𝐸𝐴𝑅 𝐹𝐼𝑋𝐸𝐷 𝐸𝐹𝐹𝐸𝐶𝑇𝑆𝑡 + 𝛽12 𝐼𝑁𝐷𝑈𝑆𝑇𝑅𝑌 𝐹𝐼𝑋𝐸𝐷 𝐸𝐹𝐹𝐸𝐶𝑇𝑆𝐼+ 𝐸𝑟𝑟𝑜𝑟𝑖𝑡
The third equation also consists of an interaction effect, namely between high board diversity (BOARDDIV) and control of corruption (CoC).
𝐻3: 𝐶𝑆𝐷𝑖𝑡 = 𝛼 + 𝛽1𝐵𝑂𝐴𝑅𝐷𝐷𝐼𝑉𝑖𝑡+ 𝛽2𝐶𝑜𝐶𝑘+ 𝛽3𝐵𝑂𝐴𝑅𝐷𝐷𝐼𝑉𝑖𝑡∗ 𝐶𝑜𝐶𝑘+ 𝛽4𝐵𝑆𝑖𝑡 + 𝛽5𝐿𝐸𝑉𝑖𝑡 + 𝛽6𝐹𝑆𝑖𝑡+ 𝛽7𝑅𝑂𝐴𝑖𝑡+ 𝛽8𝑀𝑇𝐵𝑉𝑖𝑡+ 𝛽9𝐹𝐹𝑖𝑡
+ 𝛽9𝐶𝑂𝑈𝑁𝑇𝑅𝑌 𝐹𝐼𝑋𝐸𝐷 𝐸𝐹𝐹𝐸𝐶𝑇𝑆𝑘+ 𝛽10𝑌𝐸𝐴𝑅 𝐹𝐼𝑋𝐸𝐷 𝐸𝐹𝐹𝐸𝐶𝑇𝑆𝑡
+ 𝛽12 𝐼𝑁𝐷𝑈𝑆𝑇𝑅𝑌 𝐹𝐼𝑋𝐸𝐷 𝐸𝐹𝐹𝐸𝐶𝑇𝑆𝐼+ 𝐸𝑟𝑟𝑜𝑟𝑖𝑡
This thesis utilizes OLS regressions to capture the effect of board diversity on corporate disclosure and the influence of family firms and control of corruption on this main relationship.
3.6 Endogeneity
One of the main problems in empirical corporate finance studies is the concern of
endogeneity. Endogeneity can affect the relationship between corporate disclosure and board diversity. It exists when there is a violation of one or more of the following three assumptions: Omitted variables bias, the sample has a measurement error, or the sample has reverse
causality. In this study, reverse causality can appear if a firm has a high disclosure
measure, but if we do not take it into account our results can be biased (Cuadrado-Ballesteros et al., 2015). This reverse causality could be a problem for endogeneity. To compensate for this reverse causality, I use a one year lag for all time-variant variables. The issue of endogeneity, by using the first lag, between the dependent and independent variable is then eliminated.
4.
Results
4.1 Descriptive statistics
In the following table, the descriptive statistics of the variables are collected. The table contains an overview of the number of observations, mean, minimum, 1st quartile, 3rd quartile, and standard deviation. To correct for outliers, extreme values of some variables have been winsorized from this research, because outliers can be biased and cause problems in the regression analysis. The following variables are corrected for their outliers: Firm size, MTBV. ROA and Lev. All these variables are winsorized at 1 % on both sides. Furthermore, the natural logarithm is taken from firm size (FS).
Table 5. Descriptive Statistics
Table 5 presents de descriptive statistics of the firms, boards, country-specific variables. The sample includes 1954 firms, with 7473 observations (N). Board and firm characteristics are obtained from the datastream database. The variable definitions are shown in table 4.
The mean value of the dependent variable CSD is generally high (3.13), which means that most of these firms in the sample have a high corporate social disclosure. Moreover, the standard deviation is quite low (0.8), and the 1ste quartile is already a value of 3 on a scale of 0 to 4. The board diversity variable is between 0% and 66.67 %, which means that on some boards, there are no women represent. In the extreme case, two third of the board consists of women. However, the third quartile is 22.73%, which states that women representation in this sample is not very high.
Table 6 reports the descriptive statistics by country. In general, it is observable that Australia, Great Britain, and Japan are the most dominant firms available in this research. For the countries who have more than ten firms engaging in this research, the lowest number of CSD is presented by the Philippines (2.27). Norway represents the highest percentage mean of female board members (38,86%), followed by France (27,25%) and Finland (27,05%).
Denmark (2.35) has the highest control of corruption measurement, whereas Japan (-1.24) has the lowest score.
Table 6. Descriptive statistics by country
4.2 Correlation analysis
Table 7 provides the correlation coefficient of variables engaged in this study. Highly
correlated variables weaken the power of the regression, according to de Jong, Bihn Phan, and van Ees (2010). To test multicollinearity amongst these variables, the following correlation matrix is presented. Consistent with the literature, the correlation coefficient between Firm size and Board size is quite high (0.2861), which is logic, because larger firms have more people in their board. Also, the coefficient between Control of Corruption and Board
4.3 Empirical results
Table 8. Regression results of the effect of board diversity on corporate social disclosure. The results of the OLS regression are presented in this table. All the columns include fixed effects. CSD is the dependent variable and measured as a number from 0 to 4. For more explanation, see table 1. BOARDDIV is calculated as the ratio of women to total board members. Board size (BS) is the number of board members. MTBV is the market to book value. Leverage (LEV) is calculated by dividing long term debt by assets. Firm size (FS) is calculated to the natural logarithm of total assets. Return on assets (ROA) is operating income in million dollars dived by total asset in million dollars. Control of corruption (Coc) is a measurement form the world databank in a range of -2.5 to 2.5. Family Firms (FF) is a dummy variable, which is a 1 of the NOSHEM is higher than 0. Corresponding standard errors are shown in parentheses. ***, ** and * denote statistical significance at the 1%, 5% and 10% level respectively.
Table 9 shows us the results of the second and third hypothesis. Column 1 shows us the effect of the independent and control variables. Column 2 incorporates the interaction effect
(BOARDDIV X FF), and column 3 incorporates the other interaction effect (BOARD X Coc). In the first column, family firms have lower CSD relative to non-family firms. Non-family firms who increase their board diversity will increase their CSD. In the second column the interaction effect (BOARDDIV X FF) states that it has a positive effect on the main
relationship (0.00130), this means that family firms with high board diversity have a positive effect on CSD compared to non-family firms, however the result is insignificant. There is no difference in CSD across firms based on board diversity. The interaction term for
BOARDDIV X Coc compares the effect of board diversity in countries with low and high control of corruption. The interaction term is positive and significant, which means that the effect of board diversity in high control of corruption countries has a positive effect on CSD. High control of corruption countries are the countries where there is less corruption.
Table 9. The interaction effects on corporate social disclosure.
The results of the interaction term BOARDDIV X FF and BOARDDIV X Coc are presented in this table. CSD is the dependent variable and measured as a number from 0 to 4. For more explanation, see table 1. BOARDDIV is calculated as the number of women to total board members. Board size (BS) is the number of board members. MTBV is the market to book value. Leverage (LEV) is calculated by dividing long term debt by assets. Firm size (FS) is calculated to the natural logarithm of total assets. Return on assets (ROA) is operating income in million dollars dived by total asset in million dollars. Control of corruption (Coc) is a measurement form the world databank in a range of -2.5 to 2.5. Family Firms (FF) is a dummy variable, which is a 1 of the NOSHEM is higher than 0. Corresponding standard errors are shown in parentheses. ***, ** and * denote statistical significance at the 1%, 5% and 10% level respectively.
4.4 Endogeneity problem
The following table includes the fixed effect and lagged variables in the OLS regressions. The independent and control variables are lagged by one year to address the concern of
Table 10. Regression effect including endogeneity
Table 10 includes fixed effects and lagged variables in the OLS regression to control for possible endogeneity issues. The independent variables are lagged by one year. The results are presented below. CSD is the dependent variable and measured as a number from 0 to 4. For more explanation, see table 1. BOARDDIV is calculated as the ratio of women to total board members. Board size (BS) is the number of board members. MTBV is the market to book value. Leverage (LEV) is calculated by dividing long term debt by assets. Firm size (FS) is calculated to the natural logarithm of total assets. Return on assets (ROA) is operating income in million dollars dived by total asset in million dollars. Control of corruption (Coc) is a measurement form the world databank in a range of -2.5 to 2.5. Family Firms (FF) is a dummy variable, which is a 1 of the NOSHEM is higher than 0. Corresponding standard errors are shown in parentheses. ***, ** and * denote statistical significance at the 1%, 5% and 10% level respectively.
4.5 Robustness Check
To verify the results, a robustness test is performed. Since this researched used countries from all over the world, I want to check if the results stay the same if you delete the countries with the highest number of observations: The United States and Great Britain. These two countries consist of more than 35% of the observation. Moreover, combining those two countries, the percentage of observations of family firms is lower than the average of other countries. Similarly, both countries have a positive control of corruption measurement, which could be of significant influence on the results. Therefore, I want to check the results with this
robustness test. It is surprising that the interaction term in column 2 is statistically positive and significant, which means that in family firms with high board diversity, they incorporate more CSD (10% significance level) in comparison with non-family firms.. Family firms with low board diversity still incorporate less CSD, than non-family firm. In column 3, board diversity for non-family firms changed to a non-significant result. The interaction term
Table 11. Robustness test excluding The United States and Great Britain.
This table presents the results of regression excluding The United States and Great Britain. Columns (1)-(3)include fixed effects. CSD is the dependent variable and is measured as a number from 0 to 4. For more explanation, see table 1. BOARDDIV is calculated as the ratio of women to total board members. Board size (BS) is the number of board members. MTBV is the market to book value. Leverage (LEV) is calculated by dividing long term debt by assets. Firm size (FS) is calculated to the natural logarithm of total assets. Return on assets (ROA) is operating income in million dollars dived by total asset in million dollars. Control of corruption (Coc) is a measurement form the world databank in a range of -2.5 to 2.5. Family Firms (FF) is a dummy variable, which is a 1 if the NOSHEM is higher than 0. Corresponding standard errors are shown in parentheses. ***, ** and * denote statistical significance at the 1%, 5% and 10% level respectively.
5. Conclusion and Future Research
The main question of this research is ‘What is the effect of family firms and corruption on the relationship between board diversity and corporate social disclosure?. While most studies focused on the relation between board diversity and performance (Adams and Ferreira, 2009; Kang et al. 2007), this research investigated for a relationship between family firms, control of corruption and corporate social disclosure (CSD).
The first hypothesis established was developed from existing literature (Boyd,1990; Hafsi and Targut, 2013; Siciliana 1996), which argued that board diversity has a positive effect on CSD. The results showed a positive relationship between board diversity and CSD, even after controlling for endogeneity. Nevertheless, family firms include less CSD compared to non-family firms.
The third hypothesis determined the effect of board diversity in low and high corrupt countries. Countries who have a high control of corruption coefficient, which means they have low corruption, implement more CSD. This can be seen through the positive and significant interaction term. The firms in these countries have more time and money to consume to increase their CSD (Nichols, 2012). This confirms our third hypothesis. For feature research you can also look at a firm specific component of corruption. In most corrupt transaction two parties are involved. Therefore, the firm-level corruption score of Lopatta, Jaeschke, Tchikov, and Lodhia (2017) would be interesting to add to this research.
In summary, this paper contributes to the debate on gender board diversity among firms. It has a different perspective due to the addition of family firms and the country-level variable control of corruption. Previous literature focused on the effect of firm performance, this study wanted to link board diversity to corporate social disclosure, which is related to corporate social responsibility as stated by Archel (2003).
5.1 Limitations
6. Appendix
Figure 1. Conceptual model
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