The objective of this paper is to investigate whether board gender diversity is related to the choice of capital structure of UK private firms. The unavailability of data combined with the unique features of privately owned entities means that the capital structure of private firms is not well understood (Brav, 2009; Goyal, Nova, & . Zanetti, 2011; Sattar et al., 2022). The unique characteristics of private firms combined with the lack of understanding about women directors motivate our investigation of the relationship between gender-diverse boards and the capital structure decisions of private firms in the United Kingdom (UK).
Recent studies report that women on board represent 33% in prominent public firms (Goodley, 2020) and 18.4% in private entities (Sattar et al., 2021a).2 Overall, the UK provides a representative sample to examine the relationship between female directors and private firm capital structure. Second, in contrast to the existing literature that examines firm-specific determinants, we analyze the impact of board gender diversity and find that director gender can influence private firm capital structure choice. Third, we demonstrate that a critical mass of female board representation is not necessary to create a substantial influence on private firm capital structure.
Involving female directors can increase (a) supervisory quality, (b) information sharing, (c) combined intelligence, and (d) meeting involvement (Adams & Ferreira, 2009; Gul, Srinidhi, & Ng, 2011). Together, these studies provide strong evidence that female directors' risk aversion can have a significant impact on the capital structure choice of private companies. To increase the understanding of director gender in private companies, an examination of the characteristics of female directors is critical to understanding the capital structure decision.
H3: The capital structure of private firms is related to the attributes of female directors (nationality, occupation, tenure and age).
Research design and variables measurement
Meanwhile, with age, directors may become experienced and knowledgeable, while younger board members add new perspectives and energy to board communication (Anderson et al., 2011; Johnson et al., 2012). Financial information is taken from the FAME database and board related variables from ORBIS.7 These databases are widely used to examine private companies in the UK (Akbar et al., 2013; Brav, 2009; Michaely & Roberts, 2011; Sattar). et al., 2021a). First, WMNDUM is a dummy variable that takes the value 1 if there is at least one woman on the board and 0 otherwise.
The model controls for firm risk by adding the standard deviation of ROA (VOL) measured over five years to control for earnings volatility (Sattar et al., 2021a).10 OWN is a dummy variable equal to 1 if the firm has concentrated ownership (the total number shareholders are less than four). As a result, it is possible that profitable private companies have less need for external financing and have a negative relationship with debt (Degryse, de Goeij, &. Kappert, 2012; Michaelas et al., 1999). The natural log of SIC codes for private firms (SICNO) takes into account business complexity, which may determine which specific board member capabilities are needed to function effectively (Clatworthy & Peel, 2016; Sattar et al., 2021a).
Therefore, private firms with growth opportunities are expected to exhaust internal resources and seek external funding such as debt (Michaelas et al., 1999). 17 distress (DISTRESS), as it can have a direct impact on the cost and availability of capital.
Results and discussion
Companies headed by women have lower leverage and short-term debt, but higher retained earnings on average. All models indicate a significant association between female directors with long-term debt or retained earnings after controlling for firm characteristics. We also find that female directors reduce their dividend payout ratio to reinvest in the firm, consistent with their desire to use internal capital.
In such cases, gender diverse boards may benefit private firms because women directors can better manage firm risk in these firms (Sattar et al., 2022) and may prefer to use long-term debt as a monitoring tool. Given that women board members are often labeled as “risk averse” (Huang & . Kisgen, 2013; Nadeem et al., 2019; Sattar et al., 2022), Panel C of Table 6 tests the effect of women directors in the capital structure by grouping firms into two risk categories. The results suggest that female directors increase retained earnings in both risk groups, but they only increase long-term debt in high-risk firms.
To better understand which characteristics of female directors drive changes in private firms, we next examine the influence of female director characteristics on capital structure measures. The results indicate that women on board holding three or more board positions increase influence and reduce retained earnings, likely because busy female directors do not behave like their typical risk-averse counterparts. Meanwhile, the age of female directors suggests that older female directors are risk averse and thus prefer lower interest-bearing debt and higher internal equity.
Furthermore, we posit that women directors with longer tenures have larger networks that enable firms to borrow. Women directors who have multiple nationalities, including UK and foreign women on the board, have no influence on the sources of funding in private firms. In Panel A of Table 8 , we investigate whether women directors select firms that already have the desired capital structure using the Heckman selection model to correct for self-selection bias.
The insignificant coefficients of the post-matched sample indicate that firms with female directors are comparable to the matched firms without female directors. Panels B1 and B2 indicate that the propensity score matching method removed all distinguishable differences except for the presence of female directors on the board. The finding confirms our arguments for the benefits of having female directors in private companies.19.
Conclusion
This research contributes to the literature by shedding light on the understudied capital structure choice in private firms. In contrast to the existing literature that mainly examines firm-specific determinants, this study emphasizes the impact of women directors on capital structure choice by including a more comprehensive sample that spans firm sizes, longer sample duration and a broader range of determinants. We also extend capital structure studies by indicating the need for a critical mass of women directors to create substantial influence.
Because private firms are often owned by a small circle of close-knit people, the impact of female directors on the capital structure of private family firms can enhance the understanding of this research. Institutional quality and the capital structure of microfinance institutions: the moderating role of gender diversity in governance. Corporate governance, credit ratings and the capital structure of Greek SMEs and large listed companies.
Fiscal policy and capital structure choice in UK SMEs: Empirical evidence from firm panel data. WMN Number of female directors scaled by total number of directors WMNSKEW A dummy variable equal to 1 if a gender-diverse board includes at WMNTILT A dummy variable equal to 1 if a gender diverse board includes 20% to 40% female directors and 0 otherwise.
Year and Ind Dum Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes. This table reports the effects of female director attributes such as occupation (WMNBUSY), age (WMNAGE) and nationality (LOCALWMN, FRLINKWMN and FORWMN) on firm capital structure.
