Following Adams and Ferreira (2009) and Sila et al.(2016), the proportion of female directors on the board (fractional women) is used as a measure of board gender diversity. Consistent with Adams and Ferreira(2009), Gul et al.(2011) report that board gender diversity is a substitute mechanism for corporate governance.
3 Data and main variables
Data and sample
As discussed above, the effect of board gender diversity on investment inefficiency is often greater in cases of overinvestment and in companies that require additional monitoring. If gender diversity on the board reduces investment inefficiency, this effect is greater for companies with high free cash flow.
Measures of investment inefficiency
For example, Goodman et al.(2014) use Tobin's Q as the proxy for investment opportunities and also control for cash flow, growth in assets and previous investments to allow for variations in the relationship between investment and Tobin's Q. McNichols and Stubben(2008 ) ) complement the model by further adding three interaction terms, interacting Tobin's Q individually with an indicator variable equal to 1 if Tobin's Q is in the second third or fourth quartile of its industry and year distribution.
4 Main results
- Univariate test
- Fixed-effects panel regression
- Endogeneity
- Alternative measures of investment
Following Adams and Ferreira (2009), Levi et al. (2014) and Sila et al. (2016), the fraction of female directors is the measure of board gender diversity, which is equal to the number of female directors on the board divided by the total number of directors. Faction f emalesis the fraction of female directors on the board.Xi, presents a list of control variables5 including leverage (Leverage), ROA (ROA), MB ratio (MB ratio), firm size (Log(M V) and Log(Asset ) ), board size (Board size) and the fraction of independent directors (board independence). In the current context, this means that past investment inefficiencies may influence the appointment of female directors.
Therefore, if past investment inefficiency is not significantly related to female director appointments, we can rely on the external instrumental variable approach proposed by Adams and Ferreira (2009) to address endogeneity issues. They argue that the fraction of male directors on the board who sit on other boards where there are female directors is ideal to be selected as the instrumental variable. 6 Therefore, we should also test whether prior investment inefficiency affects the appointment of female directors.
Following this (Sila et al., 2016), the following model is used to test the relationship between past investment inefficiency and the appointment of female directors. The connection of male directors on the board with other female directors is a key determinant of female directors' appointment (Adams and Ferreira, 2009; Sila et al., 2016).
5 Differences in the effects of board gender diversity
The effects of board gender diversity on over-investment and under-investment
According to Adams and Ferreira (2009) and Gul et al. (2011), the benefits of board gender diversity mainly come from improved corporate governance and improved monitoring. Therefore, the decrease in board gender diversity should be more pronounced for over-investment, something that can be disciplined by improved monitoring due to board gender diversity. To test this, first, I tabulate the standardized residuals in the models of Biddle et al. (2009) and Mc-Nichols and Stubben (2008) in three quantiles.
I then interact with our board's gender diversity measure and run the model as follows: Inefficiency status is the multi-level categorical variable that indicates whether the company falls into the underinvestment, normal investment, or overinvestment group. Fraction of womeni,t × Inefficiency Statei,t is the interaction term between Fraction of womeni,t and Inefficiency Statei,t.
The results show that the coefficients of the interaction term F raction f maest×Inf f iciency Statet. This suggests that the reduction in investment inefficiency due to board gender diversity is more pronounced for overinvestment, supporting Hypothesis 2.
The effect of board gender diversity on investment inefficiency for firms with a high free cash flow
Inefficiencyi,t =α+β1F ratio f emalesi,t×Inefficiency Statei,t +β2F fraction femalesi,t +β3Inefficiency State+CXi,t +. 9) Where Women Fraction is the share of female directors on the board of directors. Inefficiency is the multi-level categorical variable that indicates whether the firm falls into the group of underinvestment, normal investment, or overinvestment. As discussed above, gender diversity on the board offers more benefits to companies that require additional monitoring (Adams and Ferreira, 2009; Gul et al., 2011). Therefore, the monitoring effect of board gender diversity should be more pronounced for firms with high FCF problems, as they need more monitoring to prevent their managers from making inefficient investments.
Moreover, we saw in subsection 5.1 that the effect of board gender diversity on investment inefficiency is more pronounced for overinvestment. Consequently, the effect of board gender diversity on investment inefficiency should be stronger for firms that have a propensity to overinvest. This is then interacted with the measure of board gender diversity.
Inef iciencyi,t =α+β1F ratio f enamel,t×High F CFi,t−1+β2F ratio f enamel,t. 11) where the female fraction is the fraction of female directors on the board. This result suggests that the reduction in investment inefficiency due to board gender diversity is more pronounced for distressed firms with high FCF, which supports hypothesis 3.
The effect of board gender diversity on investment inefficiency for financially constrained firms
I also include firm and year fixed effects and group standard error at the firm level. In addition to the KZ index, I will also consider an alternative measure of financial constraint, known as the SA index, introduced by Hadlock and Pierce(2010). Following Hadlock and Pierce (2010), for firms with total assets above 4.5 billion dollars and firms with an age of more than 37 years, I replace these two variables with 4.5 billion dollars and 37 years.
As with the KZ index, a company with a high SA index is considered more financially constrained. The dummy variable F is financially limitedi,t−1 equal to 1 if the KZ index or the SA index is above the median at the beginning of the year, and zero otherwise. is interacted with the board gender diversity measure, Fraction femalesi,t, and the model is run as follows:. Fraction f emalesi,t × Financial Limitedi,t−1 is the interaction term between Fraction femalesi,t and Financial Limitedi,t−1.
The coefficients of the interaction term F fraction f largest×F financially constrainedt−1 suggest that the reduction in investment inefficiency due to board gender diversity is not stronger for firms with a propensity to under-invest ex-ante. Given that board gender diversity has a stronger effect on firms with ex-ante overinvestment propensity, while it does not have a stronger effect on ex-ante underinvestment propensity firms, we have looked at gender of the board. diversity has a more pronounced effect on overinvestment.
6 Channel analysis
Firm and year fixed effects are added and standard errors are clustered at the firm level. The result shows that the coefficient of F fraction female on board independence is significantly positive, which means that board gender diversity promotes board independence. For both two-stage regressions, firm and year fixed effects are added and the standard errors are clustered at the firm level.
The result in Column (2) of Panel A in Table 10 shows that the coefficient of Board Women is significantly positive at the 1% level, which means that board gender diversity improves board independence after considering endogenous issues. If board gender diversity reduces investment inefficiency through a more independent board, we should expect board independence to be associated with less investment inefficiency. The result in Panel B of Table 10 shows that firms in the top quintile of board independence have significantly less investment inefficiency than firms in the bottom quintile.
This is consistent with the finding of Liu et al.(2015) that board independence helps improve investment efficiency. The channel analysis indicates that board gender diversity increases board independence, and higher board independence is associated with less investment inefficiency, so that an increase in board independence is a channel through which board gender diversity reduces the firm's investment inefficiency.
7 Conclusion
Gender diverse An indicator variable equal to one if the company has at least one female director on the board and zero otherwise. QRT2 An indicator variable equal to 1 ifQi,t−1 is in the second quartile of its industry-year distribution and zero otherwise. Board independence Number of independent board members divided by the total number of board members.
CEO-chairman duality An indicator variable equal to one if the CEO of the company also serves as chairman of the board of the company in question, and zero otherwise. Director employment An indicator variable equal to one if at least one new director has been hired and otherwise zero. Female employment An indicator variable equal to one if at least one new female director is employed and otherwise zero.
FemaleLeave 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.
Results of a univariate test to examine the relationship between gender diversity and the inefficiency of business investments. For each year, the cross-sectional averages of investment inefficiency for gender-diverse companies and (separately) non-gender-diverse companies are calculated. Inefficiency are our two measures of investment inefficiency, taken from Biddle et al. (2009) and McNichols and Stubben (2008), respectively.
Results test whether the relationship between board gender diversity and investment inefficiency is robust to the use of alternative measures of investment inefficiency. This table investigates whether the reduction in investment inefficiency due to board gender diversity is primarily through over-investment or under-investment, as investment inefficiency manifests itself mainly in these two ways (McNichols and Stubben, 2008; Biddle et al., 2009). ; Goodman et al., 2014). This table investigates whether the reduction in investment inefficiency due to board gender diversity is more pronounced for firms with a high FCF problem, as it captures a firm's tendency to over-invest ex ante (Jensen, 1986; Biddle et al., 2009; Cook et al., 2019).
This table examines whether the reduction in investment inefficiency resulting from board gender diversity is more pronounced for financially constrained firms, as it reflects a firm's tendency to underinvest ex ante (Franzoni, 2009). This table examines whether an increase in board independence is the channel for board gender diversity to reduce a company's investment inefficiency. Then, for each year, the cross-sectional averages of investment inefficiency for the top and bottom quintiles were calculated, and then their differences.
Panel B: Comparisons of investment inefficiency between the top and bottom quintiles of board independence.
