Women on boards: Risky business?
The influence of board gender diversity on the number of cross-border
mergers and acquisitions in developing countries
Master Thesis, MSc International Business and Management University of Groningen, Faculty of Economics & Business
Thesis supervisor: dr. E. Mendiratta Co-assessor: dr. R. W. de Vries
Word count: 13.254 (excluding references and appendix)
Eline A. M. Bulsink Student number: S3218376
e.a.m.bulsink@student.rug.nl
ABSTRACT
TABLE OF CONTENTS
INTRODUCTION ... 4
LITERATURE REVIEW ... 7
Board Gender Diversity ... 7
Mergers and Acquisitions ... 11
Hypothesis Development ... 13
Number of mergers and acquisition ... 13
Performance as a moderator. ... 14
International experience as a moderator. ... 16
Conceptual model. ... 17 METHODOLOGY ... 19 Sample Selection... 19 Dependent Variable ... 19 Independent Variable... 20 Moderators ... 21 Firm performance... 21 Firm internationalization. ... 21 Control Variables ... 22 Board size. ... 22 Firm age. ... 22 Firm size. ... 22 Industry. ... 23 Analysis ... 23 Time lagging. ... 23 Basic assumptions... 23 Statistical model. ... 26 RESULTS ... 28 Descriptive statistics ... 28 Test results ... 31
DISCUSSION AND CONCLUSION ... 33
Discussion and Conclusion ... 33
Limitations and Recommendations for Further Research ... 37
Managerial and Theoretical Implications ... 38
REFERENCES ... 40
APPENDIX A ... 47
APPENDIX B... 49
INTRODUCTION
Over the last decades, companies and managers are increasingly faced with the issue of gender diversity in the workplace. Governmental organizations such as the European Commission (2018), the OECD (2018) and the United Nations (2018), have been performing research on gender equality and gender diversity. This has led to pressures on firms to increase gender diversity in boards to come to a fairer representation of the employees in their firms. Furthermore, this awareness caused some countries to develop legislation for certain firms to appoint more female directors on their boards (Adams & Ferreira, 2009; Sila, Gonzalez & Hagendorff, 2015). According to Catalyst (2018), women held 21.2% of board seats in S&P 500 companies on June 1, 2018. This is a slight increase compared to 2014, when the percentage of women on boards of S&P 500 companies was 19% (Kamonjoh, 2014). Because of the pressure that companies feel by governmental organizations and their shareholders, this number could be expected to increase further in the upcoming years.
Internationalization and globalization are becoming more and more important for firms as well (Barroso, Villegas, & Pérez-Calero, 2011). An interesting topic is to link these two booming themes to each other and find out how board gender diversity affects strategic internationalization decisions, such as engaging in cross-border mergers and acquisitions (hereafter referred to as M&As). M&As are seen as a popular internationalization strategy and are here defined as “cases of joint activities where two, once separate companies are combined into one company” (Hagedoorn & Duysters, 2002, p. 168).
Board members are one of the most powerful actors in a company and responsible for the decisions made by a company. The upper echelons theory emphasizes the importance of characteristics, values and personalities of powerful actors in a firm when looking at firm outcomes (Hambrick & Mason, 1984). Thus, in this research, any change in board composition is expected to impact firm outcomes, since the composition of characteristics and values in the executive board changes as well. Research to boards and its influence on firm outcomes has always been focused on traditional boards, which usually consisted of mostly male directors. Therefore, it was unknown whether these results would also hold for boards with more female directors, since women are assumed to have different characteristics and traits than men (Adams & Funk, 2012).
and firm outcomes (Campbell & Mínguez-Vera, 2008; Rose, 2007). However, research that investigates the influence of board gender diversity on firm outcomes finds inconsistent results. For example, when focusing on risk-taking and board gender diversity, Barber and Odean (2001) find that women are usually less risk-taking than men. Contrary to these results, research by Adams and Ragunathan (2013) showed that women on boards of banks are not more risk averse as men and research by Sila et al. (2015) showed that there is no significant relationship between gender diversity in boards and the level of risk-taking in non-financial organizations. Adams and Funk (2012) even found that female directors have more risk-loving values than male directors. Research to these behavioral differences between male and female director and their influence on firm outcomes thus shows varying results. This study contributes to ongoing research to women on boards and whether or not it affects risky internationalization choices of firms. M&As can be seen as a particularly strategically risky choice (Shimizu, Hitt, Vaidyanat & Pisano, 2004). Although it has been an increasingly popular strategy for firms to expand their business internationally over the last decades, they also have a high failure risk since only 17% of the cross-border M&As create shareholder value (Reuer, Shenkar, Ragozzino, 2004; Shimizu et al., 2004).
Chen et al. (2016) and Levi, Li and Zhang (2014) have studied board gender diversity in the context of both domestic and international M&As. They found a robust negative relationship between board gender diversity, the number of acquisitions and the acquisition size (Chen et al., 2016). It has not been studied whether their results also hold for only international M&As even though cross-border M&As are the most important form of internationalization (UNCTAD, 2017). As mentioned before, cross-border M&As have a higher failure risk and face specific challenges due to cultural and institutional differences between countries (Shimizu et al., 2004). This makes it relevant to study cross-border M&As separately (Shimizu et al., 2004). Since the cultural and institutional differences play a larger role when companies from developed countries target a company in a developing country, cross-border M&As in developing countries will be the subject of interest for this study.
The main research question of this study is:
“What influence does board gender diversity have on the number of cross-border M&As in developing countries?”
In studying the effect of board gender diversity on decision-making about internationalizing through cross-border M&As in developing countries, this research may reconcile previous mixed findings between research to board gender diversity and decision making regarding internationalization. Moreover, by using both the upper echelons theory and social identity theory, this study aims to theoretically explain the questions why more board gender diversity is associated with different internationalization choices. Globalization and internationalization strategic decision-making are important topics for multinational companies, and this research contributes to the understanding of the level of risks taken and the M&A decisions made by boards and managers of multinational enterprises. Furthermore, this research adds to both M&A research by showing the influence of board characteristics, and to board gender diversity research by investigating its influence on risky internationalization strategies.
LITERATURE REVIEW
This section explains the most important concepts within the literature that are relevant for this research and form the theoretical basis for this study. First, literature on board gender diversity and literature on M&As is reviewed, followed by an explanation of relevant theoretical perspectives. After that, three hypotheses are developed. Lastly, the conceptual model is explained.
Board Gender Diversity
Over the last decades, research to board gender diversity has been flourishing in corporate governance literature (Campbell & Mínguez-Vera, 2008; Rose, 2007). According to Herring (2009), ‘diversity’ generally concerns the policies and practices undertaken to include people that are considered different from traditional members. Since traditional board members are usually male, board gender diversity would mean that females are included in boards so that their talents can be used to reach higher results (Herring, 2009). The percentage of women in boards has been increasing over years, so research often investigates the influence of this development on an organization’s actions and outcomes (Triana, Miller & Trzebitowski, 2013). Literature on board gender diversity has mainly focused on the influence it has on firm performance (Campbell & Mínguez-Vera, 2008; Erhardt, Werbel & Shrader, 2003; Rose, 2007). However, the results of these studies are not consistent, showing both the advantages and disadvantages of board gender diversity in firms (Triana et al., 2013; Webber & Donahue, 2001).
significant relationship between board gender diversity and accounting-based measures of performance, Pletzer et al. (2015) only found a non-significant relationship. This emphasizes the ambiguity in research to board gender diversity and firm performance.
On the other hand, there is also research that shows a negative influence of board gender diversity on firm outcomes. Shrader, Blackburn and Iles (1997) found in an exploratory study that board gender diversity had a small negative influence on firm financial performance. Research by Adams and Ferreira (2009) showed that board gender diversity has a negative influence on both market valuation and operating performance and that board gender diversity may decrease board effectiveness since diverse boards are tougher monitors, which is not always necessary. In addition, Darmadi (2010) investigated the relationship between board gender diversity and financial performance in Indonesian listed companies and found that more board gender diversity is negatively related to both accounting and market performance.
Moreover, academic literature has focused on the influence of gender diversity in boards on decision-making processes. The findings that show a positive influence argue that more board gender diversity could lead to a greater variety of information sources, a broader set of perspectives and greater creativity in decision-making processes, leading to a higher quality of decision-making (Francoeur, Labelle & Sinclair-Desgagné, 2008; Triana et al., 2013; Webber & Donahue, 2001). For example, Chen et al. (2016) argue that women on boards have had different experiences than men before they enter a board position, which could lead to more comprehensive discussions in the boardroom. However, there are also studies that found a negative influence of board gender diversity on decision-making processes. More board gender diversity could also lead to less cohesion within the board, distrust and higher levels of emotional conflict that has a negative impact on group decision-making (Webber & Donahue, 2001; Williams & O’Reilly, 1998). Berger, Kick and Scheack (2014) argue that a higher level of heterogeneity in boards could disturb communication processes and thereby restrict the exchange of ideas that leads to well-founded decisions. Thus, this stream of research remains ambiguous about the exact influence of board gender diversity as well.
gender diversity and risk-taking, the results remain ambiguous. Research shows an insignificant, no or even a positive relationship between board gender diversity and risk-taking activities (Adams & Ragunathan, 2013; Berger et al., 2014; Sila et al., 2015). Since the results of this stream of research are not consistent, inferences based on prior research are made about the dynamics between board members to explain the impact of board gender diversity on firms’ decisions. Furthermore, research linked to risk-aversion is research to overconfidence. Overconfidence is a concept related to risk-aversion, but they are different from each other (Dowling & Aribi, 2013). Overconfidence is defined as “an excessive belief in one's abilities” (Dowling & Aribi, 2013: 80), whereas risk-aversion is more about the dislike of taking risks. According to Barber and Odean (2001), all human beings exhibit overconfidence, but men are usually more overconfident than women. Where research to board gender diversity and risk aversion does not deliver consistent results, research to levels of overconfidence between genders seems to be more convincing (Barber and Odean, 2001).
In research to board gender diversity and its effect on firm outcomes, several theories are often used in literature. Two of those theories are the upper echelons theory and the social identity theory, which will be applied in this study. In the upper echelons theory organizational outcomes “are viewed as reflections of the values and cognitive bases of powerful actors in the organizations” (Hambrick & Mason, 1984: 193). The powerful actors in an organization, such as top managers and board members, shape the success and failure of an organization and are responsible for the organization’s future (Hambrick &Mason, 1984). Every board member has different psychological factors that influence the way in which they evaluate situations (Finkelstein & Hambrick, 1996). The psychological factors consist of personality, values, cognitive models and other psychological factors (Cannella & Holcomb, 2005). These psychological factors are unobservable, so demographics such as age, tenure, educational and functional background are used as measures for those factors (Cannella & Holcomb, 2005). The characteristics of powerful actors in a firm determine their interpretation of strategic situations, which in turn determines their response to these situations, which ultimately influences the strategic choices that they make (Hambrick & Mason, 1984). Since the board of directors plays a central role in the strategy that companies follow, it is important to understand the process in which board members make decisions.
Social identity theory offers a social-psychological perspective on the dynamics within groups, which can also be applied to for example the board of directors (Ashforth & Mael, 1989). Social identity is defined as “that part of an individual’s self-concept which derives from his knowledge of his membership of a social group together with the value and emotional significance attached to that membership” (Tajfel, 1978: 63). The basic idea of the social identity theory is that people classify themselves and others in social groups based on prototypical characteristics such as age, gender, beliefs, or organizational membership (Ashfort & Mael, 1989). This categorization differs per person, and one person can be categorized into various groups (Ashfort & Mael, 1989). Since groups only exist in relation to other groups, the social meaning of one group can only be derived in relation to other groups (Hogg, 2001). As a consequence of this social categorization, individuals are depersonalized and seen as embodiments of the attributes of their group (Hogg & Reid, 2006). Furthermore, by this categorization, in-groups and out-groups are created. The in-group is the group to which one categorizes oneself, and the outgroups are groups of other categories. Social identity theory argues that people seek membership in social groups that they perceive as positively distinct from the other groups (Yzerbyt & Demoulin, 2010).
People tend to behave differently toward in-group members or out-group members. On the one hand they can engage in in-group favoritism, where they allocate more resources to the in-group, favor in-group members in a voting or compliment the performance of the in-group (Yzerbyt & Demoulin, 2010). On the other hand, people can engage in out-group derogation, which means that in-group members for example punish and insult out-group members (Yzerbyt & Demoulin, 2010). Furthermore, group members tend to only approach members of their in-group and to avoid members of other groups, since they expect negative consequences of interacting with out-group members (Yzerbyt & Demoulin, 2010). These negative expectations may be different for high-status majority group members and low-status minority group members. Research by Branscombe, Schmitt & Harvey (1999) indicates that members of majority groups are afraid to come over as prejudiced, where members of minority groups try to avoid confirming negative stereotypes associated with their in-groups.
the status differences are perceived as legitimate, members of low-status groups are likely to separate themselves of their in-group and try to get psychological access to an out-group with a higher-status. Thereby, they choose a positive identity over distinctiveness, since a majority group is less distinct than a minority group (Brewer, 1991). However, another often seen option for low-status minority group members is that they accept their distinct identity, although this is at the cost of a positive evaluation by the criteria of the majority group (Brewer, 1991). Research has shown that when groups are a minority relative to the amount of people in the out-group, members of these minority groups are more likely to identify with their group than members of the larger majority groups (Leonardelli, Pickett & Brewer, 2010). Also, Brewer (1991) and Leonardelli et al. (2010) argue that members of these low-status minority groups are more loyal to their group and show more in-group favoritism. By only approaching in-group members, the in-group bias and distinctiveness is demonstrated more actively (Chen et al., 2016). These dynamics lead to less cooperation and more competition between the groups (Yzerbyt & Demoulin, 2010).
So, the first consequence of group membership is that in-group members favor each other and their own group over out-groups and thereby behave differently towards in-groups or out-groups. A second consequence of group membership is that it creates less cooperation and more competition. When applying the social identity theory to boards of directors, it can be argued that boards with only male directors behave differently than boards with male and female directors. In a diverse board, a division between the male and female directors is likely to arise. Female directors are likely to be a minority and will then identify and be more loyal to their group of female directors. Although the female directors bring different insights, knowledge and experience, a competitive atmosphere will exist between the group of male directors and the group of female directors, leading to less cooperation. Since the male directors will favor the actions and ideas of in-group members, and female directors will do the same with their in-group, there will be less groupthink and more discussion. Here, it is argued that the consequences of group membership according to the social identity theory will influence the decisions made by boards.
Mergers and Acquisitions
Members of the board will take the consequences of internationalization strategies into consideration and depending on whether they think it is worth the risk, a decision will be made. A firm can choose several entry modes to enter a foreign market or to increase their share in a foreign market in which they are already active. Pan and Tse (1996) made a distinction between equity and non-equity entry modes. Equity modes of entry are entry modes that are investment intensive, such as mergers and acquisitions and green field investments (Canabal & White III, 2008). Non-equity modes of entry require less large investments, examples are licensing and franchising (Canabal & White III, 2008). All internationalization strategies involve risk-taking, but the failure risk of M&As is very high, since only seventeen percent of the cross-border M&As create shareholder value (Shimizu et al., 2004). This high failure risk requires boards of directors to make a comprehensive and thorough decision on whether to engage in a M&A or not, and for this reason this research focuses on M&As as an entry mode.
M&As are a popular strategy for corporations to expand their business and refer to “cases of joint activities where two, once separate companies are combined into one company” (Hagedoorn & Duysters, 2002: 168; Shimizu et al., 2004). A cross-border M&A of a firm based in a developed country can be performed in another developed country, or in a developing country. Cross-border M&As from developed countries to developing countries face greater challenges than cross-border M&As between developed countries, since the institutional differences between a developed country and a developing country are greater than those between developed countries (Shimizu et al., 2004; Eden & Miller, 2004). Institutional differences that firms may face are for example differences in laws and regulations, differences in norms and values and differences in accepted standards of social conduct (Dikova, Sahib & Van Witteloostuijn, 2010). The challenges that arise because of the institutional differences and the lack of knowledge about them by the acquiring firm can be called the liability of foreigness (Zaheer, 1995). The liability of foreigness is defined as “the costs of doing business abroad that result in a competitive disadvantage for an MNE subunit ... broadly defined as all additional costs a firm operating in a market overseas incurs that a local firm would not incur” (Zaheer, 1995: 342-343). So, engaging in cross-border M&As in developing countries is likely to carry more risk: first, because more money is invested due to overcoming the liability of foreigness; and second, because they bring more managerial and operational challenges that the company has to deal with (Meyer, Mudambi & Narula, 2011).
becomes more and more important for firms (Barrosso et al., 2011). It is important to fill this gap and gain more insight into the dynamics between board gender diversity and internationalization choices, since both themes are subject of increasing attention by firms and societies. It is not known yet if boards with more female representation behave differently towards cross-border M&As than less diverse boards, while insight in this topic could create a better understanding of both board gender diversity and internationalization strategies. Hypothesis Development
Number of mergers and acquisitions. Only few researchers have investigated the
influence of board gender diversity on M&As. Research of Chen et al. (2016) showed that board gender diversity leads to less acquisitions and smaller size of acquisitions. They argue that board composition impacts the dynamics within the board, which ultimately impacts the number and size of acquisitions (Chen et al., 2016). Levi et al. (2014) investigated the relationship of board gender diversity and M&As as well. Just like Chen et al. (2016), they tested whether board gender diversity has an effect on acquisition number and size. The main argument of Levi et al. (2014) to hypothesize a negative effect was that women are less motivated by empire building and also less overconfident compared to male directors. Female directors less often overestimate M&A gains and thereby help create shareholder value for the firm (Levi et al., 2014). The results showed that board gender diversity has a negative effect on the amount and size of acquisitions (Levi et al., 2014). Furthermore, Huang and Kisgen (2013) found that female directors less often engage in acquisitions, which is seen as evidence that female directors are less overconfident relative to male directors. A study by Dowling and Aribi (2013) affirms the study by Huang and Kisgen for companies in the UK. So, since women are generally less overconfident, they estimate future outcomes as less favorable and they view their predictions as less precise than men do (Levi et al., 2014). In other words, female directors may look at consequences of a decision in a more realistic way relative to male directors.
directors. This means that there will be less groupthink and cohesion in the board and more discussions. These discussions are likely to be more thorough and comprehensive since the division between directors causes them to try to convince each other from their own opinion. The decision that is ultimately made is a result of thorough deliberation of alternatives. When discussing M&A options, female directors will be aware of the riskiness of such investment and hold male directors down on acting too overconfident. Additionally, as a result of the division that has arisen within the board, discussion will take longer, be more comprehensive and decisions are made with a clear rationale. Therefore, it is likely that more M&A alternatives will be turned down and less M&A options will be discussed since the overall decision-making process takes longer. Since the risks of M&As and cultural and institutional differences in developing countries are more substantial and visible, cross-border M&As of firms in developed countries targeting firms in developing countries are subject of interest. This leads to Hypothesis 1:
Hypothesis 1: More board gender diversity leads to a smaller number of cross-border M&As in developing countries.
Performance as a moderator. Generally, research focusses on financial performance as
consistent influence of performance on decision-making processes. When a firm performs well, the decision-making process tends to be less comprehensive and board members allow more decentralization of decision-making, which means that they are less engaged in strategic decisions. For M&A decisions this could mean that discussions about M&As are less comprehensive, so discussions probably take less time and decisions are made less deliberately. Also, when the investment for a M&A to a developing country is not too large, it may even be the case that the board decentralizes this decision to lower levels of the firm.
Next to this stream of research, other research argues that when performance is high, the firm has an excess of resources that allows the board to make choices more boldly and try out new strategies or enter new markets (Bourgeois, 1981). These slack resources increase managerial contentment and irrational optimism (George, 2005). One possibility is that board members choose to undertake less new initiatives, since these experiments may decrease firm performance (George, 2005). Another possibility is that board members become more overconfident and implement strategic decisions without realistically considering all consequences (George, 2005). This means that when firm performance is high, the risks of a M&A to a developing country are perceived as less substantial by both the male and female board members, since they know that the firm is financially better able to cope with the liability of foreigness and institutional differences.
members become more overconfident (George, 2005). This has effect on the thoroughness with which the M&A decisions are made. It is likely that when performance is high the female directors will become more overconfident as well and M&A decisions are made less thoughtful and less M&As will be rejected. In other words, high firm performance makes the negative impact of board gender diversity on the amount of M&A to developing countries less strong. Thus, firm performance can be considered to play a moderating role in the dynamics between board gender diversity and cross-border M&As in developing countries. Therefore, the second hypothesis is:
H2: The negative relationship between board gender diversity and cross-border M&As in developing countries is moderated by firm performance. Board gender diversity has a less negative impact on the number of cross-border M&As in developing countries when performance is high.
International experience as a moderator. When a firm is internationally diversified, it
has developed knowledge on the firm’s own capabilities and it has created a differentiated view of foreign markets through the experiences it has gained (Johanson & Vahlne, 1977). This experience will let board members perceive lower levels of risk when considering internationalization activities than inexperienced firms (Johanson & Vahlne, 1977; Reuer et al., 2004). Furthermore, Shrader, Oviatt and McDougall (2000) argue that firms with international experience are better equipped to deal with international risks, since their experience may reduce the complexity of doing business in new foreign markets. In this line of research, Carlsson, Nordegren and Sjöholm (2005) found that Scandinavian firms with greater internationalization experience performed better in subsequent foreign direct investments. These successes may lead to overconfidence within the board, since the board members may accredit themselves for the international successes of the firm (Dutta, Malhotra & Zhu, 2016). Research by Dutta et al. (2016) found that CEO overconfidence leads to more decisions of engaging in a cross-border acquisition.
considered more M&A options than a firm with less international experience. When more options are discussed, the chance of accepting M&A options is also higher.
To sum up, research points in the direction that greater firm international experience leads to more overconfidence of board members and shorter discussions of M&A options. Since also the female directors will feel more overconfident in making internationalization decisions, it is likely that they underestimate the risks and overestimate the gains of M&As. Since both the male and the female directors are more overconfident, it is likely that less M&A options are rejected. And since the discussions per option will be shorter, more M&A options can be discussed. Furthermore, when the directors have more international experience, the process of making a discussion will be more like a routine (Dutta et al., 2016). This means that the two different groups of male and female directors are also more likely to reach consensus easier and faster. When more options are discussed, it is likely that there are more M&A options that will be accepted. For these reasons it is likely that the more international experience a company has, the less strong the negative impact of board gender diversity on the number of cross-border M&As in developing countries is.
H3: The negative relationship between board gender diversity and cross-border M&As in developing countries is moderated by firm international experience. Board gender diversity has a less negative influence on the number of cross-border M&As in developing countries when firm international experience is high.
Conceptual model. Figure 1 shows the conceptual model developed in this thesis. First,
Figure 1. Conceptual Model
Board Gender Diversity M&As to developing
countries
• Performance • Internationalization
METHODOLOGY
This section elaborates on the methodology used in this research. First the sample selection process is explained, followed by a description of the dependent, independent variables and the moderators. Furthermore, control variables are discussed. The basic assumptions are explained and tested and lastly, the analysis that will be performed on the data is explained.
Sample Selection
The sample comprises a set of companies listed on the Standard & Poor’s 500 Index over the years of 2012-2016, covering a 5-year period. The S&P 500 Index is an American stock market index, which contains the largest 500 companies listed on the New York Stock Exchange or NASDAQ. Companies listed on the S&P 500 Index account for a great part for the U.S. economy (Boulouta, 2013). Furthermore, the companies cover a broad range of company sizes and industries (Boulouta, 2013). For these reasons, the S&P 500 index is often considered as representative for the U.S. stock market. Data on directors and firm financial information is retrieved using the Thomson Reuters Datastream Database. Companies in the sample that missed information on one or more of the dependent, independent or control
variables were emitted from the sample. This led to a sample of 211firms, the names of these
firms can be found in Appendix A, Table A.1. Then, the Zephyr database was used to collect all M&A deals from the S&P 500 companies with companies in 140 developing countries, which can be found in Appendix A, Table A.2. In the 5-year period of 2013-2017, 104 cross-border M&As in developing countries were identified. This study applies panel data analysis covering multiple companies over a certain time period, which provides 1055 firm-year observations.
Dependent Variable
well (Liu, Wei & Xie, 2014). In the M&As studied the acquirer had a final stake of at least 50 percent, which is in M&A literature considered as a change in corporate control and a sufficiently high stake (Beitel, Schiereck, and Wahrenburg, 2004). The acquiring company had to be a company listed on the S&P 500, these were selected in Zephyr using their ISIN number, the International Securities Identification Number. The target company had to be a company in a developing country.
There exists no universal definition for developing countries and no universal classification system that divides countries in developed versus developing countries. The Worldbank has stopped with this classification since 2016 and replaced it with a categorization system based on gross national income (GNI) per capita. Furthermore, the International Monetary Fund and the United Nations mention that they don’t use specific criteria in distinguishing between developed and developing countries. In this study, the countries with low, lower-middle and upper-middle incomes are considered as developing countries. The 140 developing countries that are included are listed in Table A.2 in Appendix A. In the data analysis this variable will be referred to as MA.
Independent Variable
The independent variable included in this study is board gender diversity. Several measures of board gender diversity can be found in the literature (Chen, 2016; Triana et al., 2013; Adams & Ferreira, 2009; Rose, 2007). One way to measure board gender diversity is by calculating the proportion of female directors in the board of directors (Chen, 2016; Adams & Ferreira, 2009). Another way to measure it is by dummy variables, where boards of directors with at least one women take the value of one (Rose, 2007). Furthermore, the Blau index of heterogeneity can be used to measure board gender diversity (Triana et al., 2013; Campbell & Mínguez-Vera, 2008). According to Harrison and Klein (2007), the Blau Index is the most commonly used measure for diversity as a variety. Since in this study gender diversity is suggested to bring different perspectives and experiences to the board table, it is seen as a variety. The Blau index is denoted as:
" = 1 − ∑* '()
(+, (1)
Where:
pi = the proportion of group members in category i,
In this study, there are two categories, namely the proportion of male board members and the proportion of female directors. For board gender diversity (GEN), the Blau index can range from 0, when there is only one gender in a board, to 0.5 when the number of male and female directors is equal.
Moderators
Firm performance. Several measures for firm performance can be used, such as the
market-to-book ratio, the return on assets (ROA) and the Tobin’s Q. In performance measures, two streams can be distinguished: market-based performance measures and accounting-based performance measures (Dalton, Daily, Ellstrand & Johnson, 1998). According to Keats and Hitt (1988), market-based measures are forward-looking considerations of performance and give an indication on long-term perspectives and flexibility challenges that an organization could face. Accounting-based performance measures, on the other hand, are more focused on past performance and can serve as an indicator for organizational adaptation (Triana et al., 2013; Heats & Kitt, 1988). Since this study focuses on the adaptive consequences that performance could bring to a firm’s decisions, an accounting-based performance measure is used. The ROA is retrieved from the Datastream database for each company in the sample over the sample period of 2012-2016.
Firm internationalization. In this study, firm internationalization is measured as foreign
Control Variables
Board size. Board size is a common control variable in gender diversity research
(Campbell & Mínguez-Vera, 2008; Chen et al., 2016). Research to board size suggested that larger boards contain more knowledge and therefore better performance (Pearce & Zahra, 1992). However, other research argued that larger boards may have less effective decision-making processes due to less comprehensive communication and coordination (Lipton & Lorsch, 1992). Overall, most research suggests a negative relationship between board size and performance or board size and strategic change (Guest, 2009; Goodstein, Gautam & Boeker, 1994). Since this influence is also expected in this research, board size is included as a control variable. Board size (BOARD) is measured as the total number of directors of each year over the sample period.
Firm age. Academic literature is ambiguous about the effect of firm age. On the one
hand, young firms could be at risk of failure because of lack of valuable resources such as experience (Thornhill & Amit, 2003). But on the other hand, older firms could fail because of a changing competitive environment and rigidity to the new demands of the market (Thornhill & Amit, 2003). Also, it is found that older firms may less often introduce innovation, which has to do with strategic-decision making as well (Huergo & Jaumandreu, 2004). Overall, it can be concluded that academic literature is convinced that firm age has influence on business practices, but the direction of this influence is uncertain. Therefore, firm age will be taken in account as a control variable. Here, firm age (AGE) is calculated by subtracting the year of incorporation of each company from the sample years.
Firm size. Firm size is a third control variable in this research. Larger firms have more
these reasons firm size is included as a control variable in this study. Firm size is measured as the total assets of each company over the sample period and will be mentioned as TA in the data analysis.
Industry. Industry dummies were used to control for the effect of industry dynamics on
the internationalization decision-making of firms. According to Dess, Ireland and Hitt (1990), it is important to control for industry since it may lead to misleading interpretation of results when industry effects are not accounted for. In this study the Standard Industrial Classification (SIC) codes are used to create six industry dummies (sicdum), in accordance with the values in Table 1.
TABLE 1
Industry categories based on SIC codes
SIC 01-19 Agriculture, fishing, forestry, mining and construction SIC 20-39 Manufacturing
SIC 40-49 Transportation and utilities SIC 50-59 Wholesale trade and retail trade SIC 60-69 Finance, insurance, real estate SIC 70-89 Services
Analysis
Time lagging. Since the M&A announcement is preceded by a decision-making process
of the board, the effect of board gender diversity in year t are noticed in the announcement of M&As in year t+1. This timing problem can be solved by lagging the variables. Research by Liu et al. (2014) suggested that a one-year lag would be a sufficient time to measure the effects of board gender diversity on firm results that are derived from earlier decisions. Therefore, a one-year lag was used for board gender diversity (GEN), firm performance (ROA), firm internationalization (FSTS), board size (BOARD), firm age (AGE) and firm size (TA), following research of Chen et al. (2016).
Basic assumptions. Before doing any regression, some checks have to be performed on
statistics (Levin, Lin & Chu, 2002). Often, time series with a trend are non-stationary. A way to test the stationarity of variables is by using unit root tests. Several of these tests can be identified for panel data analysis, such as the Levin-Lin-Chu test, the Augmented Dickey-fuller test and the Harris-Tzavalis test. The sample in this research has a large number of companies compared to the time dimension. The Harris-Tzavalis unit root test takes into account that the N may be as large as to infinity, but that the T is fixed over the panels (Harris & Tzavalis, 1999). Since in this research there is a large N of 211 companies and a small T of 5 years per panel, the Harris-Tzavalis test is chosen to measure whether variables are stationary or not. The null hypothesis of the Harris-Tzavalis test is similar to those of other unit root tests, namely that the panels contain a unit root (Harris & Tzavalis, 1999). When the point estimate is equal to 1 there is a unit root, which means that the null hypothesis would be accepted. When performing unit root tests on the variables, the demean option was taken into account in order to control for cross-sectional correlation. After testing all variables, it can be concluded that the variables are stationary.
Secondly, it is important to check for normality. The assumption underlying regression is that the residuals are normally distributed. One way of testing the normality of the data is by using the Shapiro-Wilk test. The Shapiro-Wilk test compares the scores in the sample with scores of a mean and standard deviations that have the same values, but are normally distributed (Field, 2009). The null hypothesis is that the variables are non-normally distributed, and the alternative hypothesis is that the variables are normally distributed. In Table 2, the results of the Shapiro-Wilk test are shown. The value under W is the Shapiro-Wilk statistic and the value under V is a transformation of W into another index for normality. High values under W indicate normality, whereas large values under V indicate nonnormality. The results of the Shapiro-Wilk test in Table 2 show that the residuals are nonnormally distributed since the null hypothesis cannot be rejected because the Z value is significant on the p<0.01 level.
According to Field (2009) this does not have to be a problem, since a limitation of the Shapiro-Wilk test is that with large sample sizes it is easy to get significant results from small deviations from normality. Therefore, Field (2009) advises to plot the variables as well in order
TABLE 2
Shapiro-Wilk w test for normal data
Variable Observations W V Z
Residuals 1,055 0.50 329.79 14.39***
to check the normality. In Appendix B, figure B.1, the P-P plot and histogram of the residuals can be found. These graphs clearly show that the residuals are non-normally distributed. A way to create more normally distributed residuals is to take the logarithm of the variables. However, since the MA variable contains many zeroes this is not possible. A lot of data would be omitted, so logarithm transformations on the variables is not the optimal solution. Therefore, an OLS regression with random effects would not be appropriate to test the hypotheses, but a generalized linear model may be a more appropriate method since it accounts for the non-normally distributed residuals.
Third, the multicollinearity has to be checked for. Multicollinearity can increase the estimates of the variance of parameters (O’Brien, 2007). Multicollinearity appears when two variables are linearly dependent, which means that one of the variables can be expressed as the linear function of the other variable (Asteriou & Hall, 2006). Measuring the multicollinearity in this model was done using the variance inflation factors (VIF). One commonly used rule of thumb regarding VIF measures is that it should not be higher than 10, or that the 1/VIF value should not be smaller than 0.1 (O’Brien, 2007). When checking it for the full model it turned out that the interaction term ROAGEN, lagROA and FSTSGEN had VIF values above 10, indicating that there is multicollinearity in this model as can be seen in Table 3.
TABLE 3
VIF values with uncentered variables
Variable VIF 1/VIF
One way to solve this problem is by leaving the interaction terms ROAGEN and FSTSGEN out of the analysis, but since these variables are amongst the main variables tested in the hypotheses this is also not an option. Another possible solution could be to center the firm performance (ROA), firm internationalization (FSTS) and board gender diversity (GEN) before calculating the interaction term (Iacobucci, Schneider, Popovich & Bakamitsos, 2016). Mean centering means that the mean of a variable is subtracted from all observations on that variable in the dataset, so that the variable’s mean is changed into zero (Iacobucci et al., 2016). With this last option all variables are still included in the analysis and no data is lost. So, the new variables centered_ROA, centered_FSTS and centered_GEN were created first, in order to calculate the centered_ROAGEN and the centered_FSTSGEN. As can be seen in Table 4 the VIF values have improved substantially, going from a mean VIF value of 6.02 to a mean VIF value of 1.85 and a maximum VIF value of 5.02. This means that the level of multicollinearity improved to the extent that it is not very likely to create problems when testing the model.
TABLE 4
VIF values with centered variables
Variable VIF 1/VIF
centered_GEN 1.13 0.88 centered_ROA 1.23 0.81 centered_FSTS 1.29 0.77 centered_ROAGEN 1.10 0.91 centered_FSTSGEN 1.11 0.90 BOARD 1.17 0.86 AGE 1.28 0.78 TA 1.20 0.83 sicdum1 1.71 0.58 sicdum23 5.02 0.199 sicdum4 2.08 0.48 sicdum5 2.51 0.398 sicdum 78 3.21 0.31 Mean VIF 1.85
In order to deal with the basic assumptions of autocorrelation and heteroscedasticity, the GLM model used will be testing with the robust clustered errors.
Statistical model. Looking at the data available and the outcomes of testing the basic
which makes taking the logarithm difficult without losing the majority of observations, so the non-normal distribution has to be dealt with differently. The generalized linear model accounts for the non-normal distribution, and when performing the tests with robust clustered errors, it also accounts for autocorrelation and heteroscedasticity. Since the dependent variable MA consists of count data, namely the number of M&As per company per year, the Poisson family is chosen together with the most common log link function. According to Zou (2004) a Poisson analysis is appropriate when variables are measured for a certain length of time to analyze rare events. In case of this study, the Poisson analysis is appropriate because the cross-border M&As in developing countries are rare events and they are studied for a time period of five years.
RESULTS
In this section, the results of the proposed analysis are presented. First the descriptive statistics of the data sample are discussed. After that, the test results are reported and explained. Descriptive statistics
Table 5 displays the descriptive statistics and the correlation matrix for all variables used in this study. In this sample, the average number of M&As is 0.1, with a minimum of 0 M&As and a maximum of 4 M&As by one firm in a certain year. Furthermore, it can be seen that the means of centered_GEN, centered_ROA, centered_FSTS and the interaction terms centered_ROAGEN and centered_FSTSGEN are very close to zero. This is because these variables were mean-centered in order to avoid multicollinearity in the sample. Since the mean value of all observations has been subtracted from all separate values, the minimum values and the maximum values are influenced as well. For example, usually it is not possible to have a negative Blau Index value for gender diversity. The lowest value possible would be zero, whereas in this sample the minimum value is -0.29. The mean board size in this sample is 11, with a minimum of 6 board members and a maximum of 20 board members. The average company age is 50.39 years and the average total assets is 52.7 million dollars.
TABLE 5
Descriptive statistics and correlations
TABLE 6
Impact of board gender diversity on M&As (H1) moderated by firm performance (H2) and international experience (H3)
Variables Model (1) Model (2) Model (3) Model (4) Model (5) Model (6) Model (7)
centered_GEN 2.253* 2.213* 2.210* 2.608** 2.522* 2.583** 2.508*
(1.263) (1.287) (1.323) (1.278) (1.318) (1.314) (1.371)
BOARD 0.136*** 0.137*** 0.137*** 0.131*** 0.128*** 0.131*** 0.129***
(0.0454) (0.0460) (0.0463) (0.0469) (0.0480) (0.0475) (0.0486)
AGE -0.000708 -0.000392 -0.000383 -7.73e-05 -2.37e-05 5.88e-05 8.05e-05
(0.00353) (0.00385) (0.00392) (0.00337) (0.00339) (0.00370) (0.00375)
TA -5.50e-10 -4.83e-10 -4.81e-10 -5.46e-10 -5.45e-10 -5.16e-10 -5.23e-10
(5.11e-10) (4.78e-10) (4.82e-10) (5.35e-10) (5.33e-10) (5.10e-10) (5.16e-10)
centered_ROA 0.0109 0.0107 0.00464 0.00489 (0.0229) (0.0223) (0.0230) (0.0222) centered_ROAGEN 0.00509 -0.0177 (0.204) (0.202) centered_FSTS 0.0116** 0.0112** 0.0113** 0.0110** (0.00485) (0.00478) (0.00502) (0.00491) centered_FSTSGEN 0.0177 0.0184 (0.0331) (0.0335) Constant -3.862*** -3.905*** -3.903*** -3.883*** -3.859*** -3.900*** -3.881*** (0.532) (0.549) (0.557) (0.541) (0.553) (0.556) (0.573)
Test results
The results of performing the generalized linear model with the Poisson distribution and the log link function can be found in Table 6.
Hypothesis 1 predicts that board gender diversity is negatively related to the number of cross-border M&As in developing countries. Model 1 shows a significant positive effect of board gender diversity (b = 2.253, p<0.1), not supporting Hypothesis 1. Furthermore, the control variable board size has a positive significant effect and the industry dummy of SIC codes between 01 and 19 has a negative significant effect on the number of M&As in developing countries. All other control variables are not significant.
Hypothesis 2 predicts that there is an interaction between board gender diversity and firm performance such that board gender diversity has a weaker negative impact on the number of cross-border M&As in developing countries when firm performance is high. In model 2 of Table 6, the effect of firm performance on the number of M&As in developing countries is positive, but insignificant (b = 0.0109, p>0.1). In Model 3, the interaction term of board gender diversity multiplied by firm performance was added, and this still led to an insignificant result (b = 0.00509, p>0.1). So, there is no support for Hypothesis 2.
Hypothesis 3 predicts that there is an interaction between board gender diversity and firm international experience, such that board gender diversity has a weaker negative impact on the number of cross-border M&As in developing countries when firm international experience is high. Model 4 in Table 6 shows that the effect of international experience on the number of M&As in developing countries is positive and significant (b = 0.0116, p<0.05). After adding the interaction term of board gender diversity and international experience, it can be seen that contrary to Hypothesis 3, it is not significant (b = 0.0177, p>0.1).
Lastly, the full model has been tested as well. In model 8 of Table 6 this full model can be found. In this model, the outcomes regarding the hypotheses do not change. Board gender diversity is significantly positively related to the number of M&As in developing countries; firm performance and international experience do not have significant moderating effects on the relationship between board gender diversity and the number of M&As in developing countries; the control variables board size and industry SIC 01 to 19 are the only control variables in the model with significant respectively positive and negative effects.
DISCUSSION AND CONCLUSION
This research studies the relationship between board gender diversity and the number of cross-border M&As in developing countries of firms listed on the S&P 500 over the period 2012-2016. To be able to gain insight into this research question, a Poisson analysis was conducted. This chapter first discusses the results and answers to the hypotheses. After that, the main research question is answered, and the managerial and theoretical implications are explained. Finally, the most important limitations are addressed and recommendations for future research are given.
Discussion and Conclusion
Based on the upper echelons theory and social identity theory, three hypotheses were developed. The first hypothesis predicted a negative relationship between board gender diversity and the number of cross-border M&As in developing countries. The underlying reasoning for this hypothesis is based on the social identity theory, which states that heterogeneous boards are divided in in-groups and out-groups that hamper groupthink and increase comprehensiveness of decision-making processes. Additionally, research to behavioral differences between male and female directors regarding to risk-aversion and overconfidence is used to create this hypothesis. Hypothesis 1 was not supported by the results, on the opposite, a robust significant positive relationship between board gender diversity and the number of cross-border M&As in developing countries was discovered. Even though prior research has suggested that there is a negative relationship between board gender diversity and the number of M&As, this result is not found when only looking at cross-border M&As in developing countries. There are several explanations that can be thought of.
directors using a survey. The results of this survey showed that women are slightly more risk-loving than men. The results of the current study can confirm the results of Adam and Funk (2012) from a viewpoint that measures the risk-taking of boards by looking at firm outcomes, namely the number of M&As in developing countries.
A second explanation for the significant positive effect of board gender diversity on the number of cross-border M&As in developing countries can be provided by the resource dependence theory. The key insight of the resource dependence theory is that organizations are open systems that are dependent on their external environment for survival (Hillman, Shropshire & Cannella, 2007). The board of directors is an organ that can form linkages with the external environment and by appointing members with valuable knowledge, skills and networks, a firm gains resources and reduces its dependency (Hillman et al., 2007). According to Hillman et al. (2007) it is beneficial for the firm to increase board gender diversity for several reasons. First, a more diverse board has more information sources, a greater range of perspectives and leads to more creativity, benefits that are likely to outweigh negative implications such as less communication and more conflict (Hillman et al., 2007). Furthermore, female directors may link the organization to different customers, employees, suppliers and investors since they function as role models and symbols of commitment to minorities and females (Hillman et al., 2007). Since a more diverse board leads to more networking opportunities to providers of resources, it is likely that more diverse boards identify more M&A options through the divergent networks. With more opportunities to obtain more resources and to reduce a firm’s dependency, it is from a resource dependence perspective also more likely that there will be a higher number of M&As. So, more board gender diversity brings a greater variety in linkages to the external environment and networking opportunities, which in turn provide more options for M&As that may be favorable to the firm. In that way, more board gender diversity leads to a higher number of cross-border M&As in developing countries.
the market-based performance measure, the Tobin’s Q, would have had a significant influence on the decision to engage in M&As in developing countries. Rose (2007) argues that the Tobin’s Q is often used within corporate governance literature, because it can be seen as a measure of the firm’s ability to create shareholder wealth. Also, Rose (2007) adds that accounting-based measures such as the return-on-assets is more sensitive to the asset valuation principles chosen by managers themselves. Another factor that has to be taken into account when interpreting the results is that there was a low percentage of M&As when looking at the total observations. Out of the 1,055 observations, there were only 104 M&As, which is less than 10% of all observations. The insignificant result could be a consequence of this low percentage. Explanations for the few M&As could be that developing countries are not popular countries to expand business to, or that S&P 500 firms are already active in these countries and do not seek after more involvement in the developing countries. Additionally, the time range of five years could be too narrow and S&P 500 firms not the most appropriate firms to use in this research.
gradually expand to countries with greater cultural and institutional distance. So, the more international experience a firm has, the more likely a firm is to internationalize to a developing country.
When looking at the outcomes of the Poisson analysis, it is remarkable that the control variables board size and the agriculture, fishing, forestry, mining and construction industry are significant at the p<0.01 level throughout all tests. Board size has a significant positive influence on cross-border M&As in developing countries. This means that the larger the size of the boards, the more likely they are to engage in M&As in developing countries. This is contrary to the expectation that board size would have a negative relationship to the number of M&As in developing countries. Larger boards contain more knowledge and are more likely to be more diverse (Carter et al., 2003). So, following a resource dependence perspective, a larger board contains more knowledge and resources and is more likely to connect the firm to the external environment, which can be done via M&As (Carter et al., 2003). Pearce and Zahra (1992) found that when a firm pursues an external growth strategy, the board is likely to be larger. An external growth strategy involves practices such as mergers, acquisitions and joint ventures to expand a firm’s domain (Pearce & Zahra, 1992). When a firm follows an external growth strategy, it is likely to engage in more M&As and appoint more members to the board. So, the boards are growing in size, but since the firm still follows the external growth strategy the firm is also more likely to engage in more M&As. Regarding the significant, negative influence of the agriculture, fishing, forestry, mining and construction industry it can be said that this stream of industry is mostly bound to geographic areas, so when a new firm enters this industry, the proportion of M&As compared to the total number of observations will probably be smaller than before because firms in this industry are not likely to enter in M&As.
between male and female directors regarding to risk-aversion and overconfidence. Nevertheless, this study seems to confirm research by Adams and Funk (2012) who found that female directors may be more risk-loving than male directors. Furthermore, a more appropriate theory that is confirmed by the outcomes of this research is the resource dependence theory, which argues that female directors bring in different linkages to the external environment and thereby increase the opportunities to obtain resources through M&As.
Limitations and Recommendations for Further Research
This research is bound by several limitations which need explanation and can be looked at as suggestions and opportunities for future research. A first limitation concerns the underlying literature and theory. The effect of board gender diversity on internationalization strategies such as cross-border M&As have not been studied often, so there is only limited literature that could be used to create theoretically well-supported hypotheses. More research to this relationship is necessary to be able to draw generalized conclusions. Furthermore, research to board gender diversity often finds conflicting results which make it difficult to predict what the exact effect of board gender diversity on firm outcomes is.
A second limitation in this research is that only firm outcomes are studied and not the decision-making processes themselves. It is possible that the resource dependence theory or the more risk-loving values of female directors found by Adams and Funk (2012) do not provide an accurate explanation for the positive and significant relationship between board gender diversity and the number of cross-border M&As in developing countries. More research to the actual decision-making process is needed in order to say whether the positive relationship between board gender diversity and M&As in developing countries is a consequence of risk-loving values of female directors and dynamics explained by the resource dependence theory.
A third limitation for the analysis is that the research sample contained many zeroes. Because of these zeroes the sample did not have a normal distribution and a lot of data would have been lost when the variables were logged. When studying the number of cross-border M&As in developing countries, the M&A variable is always likely to contain many zeroes since it is a risky decision that firms do not engage in too often, so taking a sample size of ten years instead of five would provide a higher number of M&As, but it is likely that the sample will still contain many zeroes.
2005). A limitation of the Poisson model is that it uses equidisperion, in which the variance is assumed to be equal to the mean. This may not always be the most optimal method for count data. For example, a more advanced negative binomial regression does not assume equidispersion and may therefore fit this data better. Another option is to look at a zero-inflated Poisson analysis, since the dependent variable contains many zeroes.
Lastly, this research does not take into account the case of reverse causality. After a firm engages in a M&A, it is possible that board members of the acquired firm take place on the board of the acquiring firm. This could change board composition in terms of gender diversity. In that way cross-border M&As may lead to more board gender diversity. This reverse causality is not taken into account in this study, but future research could consider it.
To increase the generalizability of this study, further research could study the effect of board gender diversity on the number of M&As in developing countries using a sample with firms from other developed countries, such as M&As from similar European countries in developing countries. What would also be interesting to investigate in future research would be to study whether there are cultural values of board members that moderate the relationship between board gender diversity and the number of M&As in developing countries.
Managerial and Theoretical Implications
This research contributes to academic literature in multiple ways. Firstly, this research provides more insight into board gender diversity and its relationship to internationalization strategies, which has not been studied frequently in previous research. Secondly, this research contributes to M&A literature as well, since this research shows that board characteristics have an influence on the M&A decisions made. Thirdly, this research showed deviating results from previous research to board gender diversity and the number of M&As, which offers a new perspective on female representation in boards and their level of risk-aversion. Additionally, these results show that further research is needed to investigate how board gender diversity influences the decision-making process when discussing risky M&A options.
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