In this paper, I have investigated the effect of board gender diversity on a firm’s investment ineffi- ciency. Using the two inefficiency measures proposed byMcNichols and Stubben(2008) andBiddle et al.(2009) and measures that use total investment or investment excluding R&D expenditures, I have found a significantly negative relation between board gender diversity and investment inefficiency.
This relation is robust after addressing endogeneity concerns using an instrumental variable approach.
Moreover, past investment inefficiency does not affect female directors’ appointments, which supports the use of an external instrumental variable rather than the internally generated instrumental variables of a dynamic model. These findings suggest that board gender diversity reduces investment ineffi- ciency.
In addition, the reduction of investment inefficiency due to board gender diversity is more pro- nounced for over-investment than under-investment. This effect is also more pronounced for firms with a high free cash flow (FCF) than it is for low-FCF firms because high-FCF firms have a propen- sity to over-invest ex-ante. However, the effect on financially constrained firms that have a propensity
to under-invest ex-ante has not been found to be more pronounced. These findings are consistent with the literature showing that board gender diversity provides benefits mainly via improved monitoring (Adams and Ferreira, 2009;Gul et al.,2011) and female directors’ being more risk-averse, less over- confident, and more conservative in making investment decisions (Sunden and Surette,1998;Barber and Odean,2001;Bernasek and Shwiff,2001;Levi et al.,2014). This paper has also shown that board independence is a channel through which board gender diversity reduces investment inefficiency.
Appendix: The Definitions of the Variables
Variable Definition
Inef f iciencyB Investment inefficiency calculated using the model ofBiddle et al.(2009).
Inef f iciencyBW Investment inefficiency calculated using the model ofBiddle et al.(2009) with the total investment excluding R&D as the dependent variable.
Inef f iciencyM Investment inefficiency calculated using the model of McNichols and Stubben(2008).
Inef f iciencyM W
Investment inefficiency calculated using the model of McNichols and Stubben(2008) with the total investment excluding R&D as the dependent variable.
Inef f iciency State
A multi-level categorical variable that equals 0, 1, or 2 if the standard- ized residuals (no absolute value) in the models ofBiddle et al.(2009) and McNichols and Stubben(2008) are sorted into the bottom, middle, or top quantile, respectively
Fraction females Number of female directors on the board divided by the total number of directors on the board.
Gender-diverse An indicator variable equal to one if the firm has at least one female director on the board and zero otherwise
F raction malesCW F
Number of male directors on the board who sit on other boards on which there are female directors, divided by total number of male directors on the board
TI
Total investment, calculated as the sum of capital expenditures (Compustat data item 128), R&D expenditures (Compustat data item 46) and acqui- sitions (Compustat data item 129) minus the sale of property, plant and equipment (Compustat data item 107), scaled by total book value of assets (Compustat data item 6) at the beginning of the fiscal year
TIW
Total investment excluding R&D expenditures. It is the sum of capital ex- penditures (Compustat data item 128) and acquisitions (Compustat data item 129) minus the sale of property, plant and equipment (Compustat data item 107), scaled by total book value of assets (Compustat data item 6) at the beginning of the fiscal year
SG Sales growth, equal to sales at the end of current year minus sales at the end of previous year, divided by sales at the end of previous year.
AG
Asset growth, which equals the natural log of total book value of assets (Compustat data item 6) at the end of current year divided by total book value of assets at the end of previous year.
Appendix: Continued
Variable Definition
CF
Operating cash flow, which equals net cash flow from operating activities (Compustat data item 308) divided by total book value of assets (Compustat data item 6) at the beginning of the fiscal year.
Q
Tobin’s Q, which equals (MV + AT - CEQ) / AT, where MV is the market value of equity (Compustat data item 25 x Compustat data item 199), AT is the total book value of assets (Compustat data item 6) and CEQ is the book value of common equity (Compustat data item 60)
QRT2 An indicator variable that equals 1 ifQi,t−1is in the second quartile of its industry-year distribution and zero otherwise.
QRT3 An indicator variable that equals 1 if Qi,t−1 is in the third quartile of its industry-year distribution and zero otherwise
QRT4 An indicator variable that equals 1 ifQi,t−1is in the fourth quartile of its industry-year distribution and zero otherwise.
Board size Number of directors on the board
Board independence Number of independent directors divided by total number of directors on the board.
CEO-chairman duality An indicator variable equal to one if the CEO of the firm also serves as the chairman of the board in that firm, and zero otherwise
Leverage
Market leverage, calculated as (DLTT+DLC)/(AT+MV-SEQ-TXDB), where DLTT and DLC are the long term debt (Compustat data item 9) and short term debt (Compustat data item 34) of a firm, respectively. AT is the total book value of assets (Compustat data item 6). MV is the market value of equity (Compustat data item 25 x Compustat data item 199). SEQ is the total shareholders’ equity (Compustat data item 144). TXDB is the deferred tax (Compustat data item 74) (Frank and Shen,2016).
MB ratio
Market-to-book ratio, calculated as(AT+MV-SEQ-TXDB)/AT, where AT is the total book value of assets (Compustat data item 6), MV is the market value of equity (Compustat data item 25 x Compustat data item 199), SEQ is the total shareholders’ equity (Compustat data item 144) and TXDB is the deferred tax (Compustat data item 74) (Frank and Shen,2016).
ROA
Return on assets, calculated as OIBDP/AT, where OIBDP is the income before depreciation and amortization (Compustat data item 13) and AT is the total book value of assets (Compustat data item 6).
Appendix: Continued
Variable Definition
Log(MV) The natural logarithm of firm’s market value of equity (Compustat data item
25 x Compustat data item 199) .
Log(Assets) The natural logarithm of firm’s total book value of assets (Compustat data item 6)
FCF
Free cash flow. F CFi,t = IN Ci,t−T AXi,t−IN T EXPAsseti,t−P EDDIVi,t−COM DIVi,t
i,t . IN C is op-
erating income before depreciation (Compustat item No. 13). T AXis total income tax (Compustat item No. 16) minus the change in deferred taxes from the previous year to the current year (change in Compustat item No. 35). P EDDIV (Compustat item No. 21) andCOM DIV (Compustat item No. 19) are dividends on preferred shares and common shares respectively.Assetis the firm’s total assets.
KZ The KZ index introduced by Kaplan and Zingales (1997) to measure a firm’s financial constraints.
SA The SA index introduced byHadlock and Pierce(2010) to measure a firm’s financial constraints.
Director appointment An indicator variable equal to one if at least one new director has been appointed and zero otherwise
F emale appointment An indicator variable equal to one if at least one new female director has been appointed and zero otherwise
F emaleLeave An indicator variable equal to one if at least one female director has left the board and zero otherwise
M aleLeave An indicator variable equal to one if at least one male director has left the board and zero otherwise