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Equality, Diversity and Inclusion: An International Journal
Board gender diversity and firm’s equity risk
Mohammad Issam Jizi, Rabih Nehme,
Article information:
To cite this document:
Mohammad Issam Jizi, Rabih Nehme, "Board gender diversity and firm’s equity risk", Equality, Diversity and Inclusion: An
International Journal, https://doi.org/10.1108/EDI-02-2017-0044
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1
Board gender diversity and firm’s equity risk
Abstract
Purpose – There is a growing attention toward the importance of women’s participation on
corporate boards in enhancing board governance and decision-making quality. The literature
lacks sufficient empirical evidence on the relationship between women’s involvement on
boards and firms’ risk. This paper aims to investigate the influence of board gender diversity
on firms’ risk.
Design/methodology/approach - This paper explores the influence of women’s participation
on corporate boards on firms' stock return volatility. The examined firms are all non-financial
firms listed on the FTSE 350 index between 2008 and 2013. The Bloomberg database is used
to collect the needed variables. Panel data is employed through a regression model to
estimate relationships. One-step Arellano and Bond and the generalized method of moments
are used to control for reverse causality and the existence of endogenous variables.
Findings - The results suggest that women’s participation on corporate boards favorably
impacts firms’ risk by reducing firms’ stock return volatility. We also find that the influence
of women on reducing stock return volatility is higher in four particular industries recognized
by their close proximity to consumers (consumer goods, consumer services, health care, and
utilities).
Originality/value - The study contributes to the growing literature on women on boards and
offers solid empirical evidence of the correlation between board gender diversity and firms’
risk. The empirical results provide economical and statistical validity to the ''voluntary
business-led'' approach of Davies reports and to the recommendation by the UK corporate
governance code 2014 on the favourable influence of board gender diversity for effective
functioning.
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Introduction
With the changing business environment and the increasing complexity of corporations, there
is growing attention to the importance of appointing female directors on corporate boards to
facilitate effective board functioning (Adams and Ferreira, 2009; Chapple and Humphrey,
2014). Previous research on board gender diversity and firm performance highlights the
positive influence of the representation of female directors on firms' financial returns
(Shrader et al., 1997; Smith et al., 2006; Campbell and Minguez, 2008; Adams and Ferreira,
2009; Luckerath-Rovers, 2013). It is argued that women on boards are more inclined toward
transparency and are more effectual in monitoring management activities, which result in
better decision quality (Gul et al., 2011, Srinidhi et al., 2011; Vathunyoo et al., 2016). Female
directors are found to be more conservative and risk averse than male directors. Their
participation on boards is linked to better earning quality, higher levels of liquid assets, and
higher equity capital (Gul et al., 2011; Srinidhi et al., 2011; Loukil and Yousfi, 2015; Palvia
et al., 2015). Additionally, Faccio et al. (2016) and Palvia et al. (2015) find that firms led by
female CEOs are less volatile and less subject to failures, particularly during periods of
financial stress. Indeed, the selection of directors from a wider pool of talents brings diverse
life experiences, beliefs, backgrounds, and stakeholder connections and provide a better
platform for sound governance and quality decision-making (Brammer et al., 2007; Trejesen
et al., 2009; Dezso and Ross, 2012; Liao et al., 2015; Gupta, 2017). In other words, a gender-
diverse board is more capable of representing and understanding its environment, managing
business challenges, and responding to the concerns and needs of multiple groups of
stakeholders.
The importance of women on boards has led some European governments to set
gender quotas forcing large public companies to have gender diverse' boards. In the UK,
efforts to encourage women’s participation in leadership positions have started decades ago.
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However, the Lord Davies report in 2011 was the first to encourage FTSE-listed firms to
achieve a set target of 25% female board representation. The UK Corporate Governance
Code (2014) has supported the Davies report initiative by emphasizing the importance of
board diversity to facilitate effectual functioning and stakeholder relationships. A growing
body of literature on the relationship between women board participation and firm financial
performance has focused on accounting performance or firm value (Shrader et al., 1997;
Smith et al., 2006; Campbell and Minguez, 2008; Erhardt et al., 2008; Adams and Ferreira,
2009; Dezso and Ross, 2012; Luckerath-Rovers, 2013). However, there is a dearth of
empirical studies and inconclusive evidence on the nexus of women on board and firm risk
(Loukil and Yousfi, 2015; Post and Byron, 2015;).
If women’s participation on corporate boards enhances boards' governance and
decision quality, one would expect that boards with more women representation will be more
efficient in managing firms' risk. Our research contributes new empirical evidence on the
association between board gender diversity and stock price volatility of the FTSE 350 firms
and identifies in which industry female directors have greater influence on firms' stock
volatility. The paper provides evidence from the UK, reflecting the response to a voluntary
board gender target. In addition, the examined sample is selected from year 2008 to 2013
inclusive, which is likely to help in recognizing the change in women board representation as
a response to the Davis report target. Our results provide policymakers and listed firms with
empirical evidence illustrating the influence of female participation in corporate decision-
making.
However, we cannot claim that no other research has examined the impact of board
gender diversity on firm risk; to our knowledge, most empirical studies examine the influence
of women’s board participation on firm performance using accounting measures or firm value
such as Tobin’s Q and are conducted mainly on firms in the US and some European countries
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4
(other than the UK). Therefore, we believe that our findings are new and represent powerful
support for appointing more female directors on FTSE corporate boards and removing
barriers to help firms achieve better performance.
In this study, we explore whether women participation on corporate boards has any
significant effect on firm risk measured by stock return volatility. The relationship is
examined using six years of data on FTSE 350 non-financial firms. We run several panel data
regressions of stock return volatility and control for variables that are commonly found to
impact firm risk. We find that the participation of women on boards reduces stock return
volatility. The results suggest not only that the existence of women has favorable
consequences on firm risk, but also that a higher percentage of women’s participation on
boards leads to greater reduction in stock return volatility. In addition, we find that, in
industries attributed by close proximity to customers and/or those that serve a high
percentage of females, women on the board are more influential on stock return volatility.
Therefore, our results empirically support the Davies report and the UK corporate governance
code guidelines toward more gender-diverse boards. The reported findings encourage FTSE
firms to attract and appoint more female directors on their boards to improve their financial
performance.
The following section provides a review of the literature and background information.
The research design and hypotheses testing are discussed in Sections 3 and 4. Robustness
tests and results are interpreted in Section 5. The conclusion is provided in the last section.
Literature review and hypotheses development
The latest decade witnessed growing attention to the role of gender in executive positions and
the board of directors. Board gender diversity has formed widespread interest and developed
a new dimension in the debate of corporate governance. The lead belonged to Norway, as it
took the initiative of setting a 40% quota for women on board participation starting in 2005;
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non-complying companies faced dissolution (Seierstad and Opsahl, 2011). Spain followed
Norway by adopting a quota law in 2007 to achieve 40% representation of female directors
on corporate boards by 2015 (Adams and Ferreira, 2009). France, in January 2011, passed a
law requiring large firms (those with more than 500 employees) to have at least 20% women
on boards and to gradually increase women’s representation to 40% by 2017 (European
Commission, 2011). The France quota law considers the appointment of a board member
invalid if it does not satisfy the gender diversity quota requirement (European Commission,
2011). Other European countries, such as Belgium and Italy, call for one third of each gender
to be presented on boards and hold firms liable for not complying with the quota law, subject
to fines and sanctions. While Norway, France, Belgium, and Italy penalize firms for not
complying with the board gender diversity quota laws, Germany requested its large public
companies to appoint females to at least 30% of the board director positions by 2016 and to
keep the unfilled women’s seats vacant until they find enough female directors (European
Commission, 2011; Berger et al., 2014; Seierstad et al., 2017).
Unlike other European countries, the UK has not imposed a board gender quota to
enhance women’s board representation, but adopted a different strategy. Initially, FTSE 100
firms were encouraged through the Davies reports to achieve a target of 25% women on their
boards (Davies Review Annual Report, 2015). By approaching the 25% set target by year
2015, a new target of 33% women on boards was set for FTSE 350 firms to achieve by 2020
(Hampton-Alexander Review, 2016). The first report on women on boards by Lord Davies of
Abersoch was issued on February 2011. The report encourages all FTSE firms to set the
targeted percentage of female directors for the coming four years and urges FTSE 100 firms
to have at least 25% women on their boards. In addition, firms were called to disclose the
percentage of female directors on their boards and to report in their 2012 “Corporate
Governance Statement” on the progress of this matter. The business case for improving board
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gender balance in the report focuses on boards’ enhanced performance if women contribute
in the boardroom. As women comprise around half of the workforce and are as successful as
their counterparts educationally and in their careers, firms will benefit by drawing from a
larger pool of talents to enhance boards' performance. That is, diversity on boards facilitates a
wider range of perspectives, different life experiences, higher attention to detail, and the
ability to understand the needs of various stakeholders.
In a five-year summary, the “Women on Boards Davies Review” report shows that
FTSE firms have responded to the call for higher women representation on corporate boards.
In general, all-male boards were reduced dramatically to zero by 2015 in FTSE 100 firms,
and female representation on FTSE 350 firms has doubled since the issuance of the first
report in 2011. Building on the success of the Davies Review, the Hampton-Alexander
Review (2016) points out two important dimensions to encourage firms to voluntarily
increase their female representation. The review highlighted the importance of women’s
skills and perspectives in decision making and the economic loss faced if they are not well
represented in leadership positions. It sought to “address the significance of under-
employment of women and costly loss of their skills to British business and the economy.”
Additionally, the review sets a new target of 33% women’s representation on boards for all
FTSE firms to achieve by 2020 and recommends enhancing female representation in
executive committees, maintaining the “voluntary business-led approach.”
Traditional literature on women on boards is largely descriptive (Terjesen et al., 2009;
Sealy et al., 2017). In 2009, scholars started theorizing and examining the interrelationships
between women on board and firms’ financial performance to justify women board
participation (Sealy et al., 2017). However, a business case to support women’s participation
on boards should not only be linked to firm financial performance (Ferreira, 2015).
According to Senbet and John (1998), board composition is a major factor affecting its
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monitoring capacity. Boards’ heterogeneous composition represents and reproduces its
society, environment, and stakeholders and can contribute positively to firm performance and
shareholders' value (Erhardt et al., 2003; Smith et al., 2006; Brammer et al., 2007). Firms'
performance is the consequence of quality decision making, innovation, and creativity
(Siciliano, 1996). Having a gender-diverse board facilitates diversity in voice and life
experience, which enrich creativity and result in better governance and performance overall
(Singh and Vinnicombe, 2004). Female directors are likely to bring new insights into
significant strategic decisions, particularly those related to female customers, trading
partners, and personnel (Daily et al., 1999). Their understanding, which might be better than
male directors' understanding, of some business and/or market segments improves board
decision quality (Singh and Vinnicombe, 2004). Women’s participation on boards could also
improve firms' image and have a positive influence on consumer behavior (Smith et al.,
2006). Gender-diverse boards may, thus, reflect the absence of discrimination, offer a
comprehensive knowledge base, and provide a set of business solutions for better board
functioning (Carter et al., 2003; Erhardt et al., 2003; Dezso and Ross, 2012).
Both agency theory and stakeholder theory are helpful in explaining the board gender
diversity–firm risk nexus (Chapple and Humphrey, 2014). From an agency theory standpoint,
having more female directors on boards limits financial consequences (Tanaka, 2014;
Sabatier, 2015). The mix of diverse life experiences and capabilities is important to boards in
executing their fiduciary duties and assessing management strategies (Hillman and Dalziel,
2003). According to Adams and Ferreira (2009), women on boards are more likely to be
independent compared to their male counterparts and are more inclined to fire poor-
performing CEOs. The fact that female directors “do not belong to the old boys' club” make
them more likely to emphasize the independence concept more (Adams and Ferreira, 2009).
Women on boards are inclined toward more transparency and disclosing voluntarily public
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information to enable investors to better assess the firm, which improves stock value
(Krishnan and Parsons, 2008; Gul et al., 2011). Other studies highlight women’s risk-
aversion behavior and their role in facilitating board decision-making communication
(Bilimoria, 2000; Schubert, 2006). Approaching compromised decisions reduces firms’ risk
through reducing variability in performance (Lenard et al., 2014). Tanaka (2014) shows that
firms with gender-diverse boards experience lower cost of public debt. Tanaka (2014) argues
that the monitoring and advising capacity of outside female directors reduce agency conflict
and the risk of default; consequently, bondholders perceive women on boards as a form of
protection of their interests. Carter et al. (2003), Campbell and Minguez-Vera (2008), and
Dezsö and Ross (2012) conclude that women on the boards of Fortune 1000 companies and
Spanish firms lead to better shareholders’ value. The optimistic investors' reaction of board
gender diversity encourages firms to have gender-balanced boards, as this is likely to
maintain and/or improve board independence (Kang et al., 2009). Therefore, gender-diverse
boards have better corporate governance outcomes, which influence firms' reputation and
financial performance (Terjesen et al., 2009).
Ryan and Haslam (2005) observe the correlation between women on boards and firm
market performance by examining stock behavior in the month prior to and after the
appointment of a matched sample of male and female directors. They find that firms that had
experienced a decline in the stock market had appointed female directors. However, after the
three-month period of appointment, the decline in stock returns had reduced, and the return
matched with the return of firms that had appointed male directors. In a later study, Haslam et
al. (2010) show that the relationship between board gender composition and firm
performance varies according to the employed performance measure. They argue that, while
no correlation exists between women on boards and accounting-based performance measures,
a negative correlation exists with market-based measures. While Sabatier (2015) argues that
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gender-diverse boards assist firms in reducing inefficiencies and get them closer to their
optimal performance, Joecks et al. (2013) address the debate on board gender diversity from a
critical mass perspective. Joecks et al. (2013) show that women’s participation on boards can
influence positively the performance only if their representation exceeds 30%, otherwise their
presence will have an adverse effect. A look at investors’ reactions to women’s board
participation shows that the representation of female directors on boards enhances
monitoring, evidenced by higher earnings quality and accounting returns (Srinidhi et al.,
2011; Post and Byron, 2015). Lenard et al. (2014) examine a sample of US firms, showing
that higher female participation on boards contributes to a reduction in stock market
variability. Similarly, Liu et al. (2014) and Sabatier (2015) show that women’s participation
on boards of directors enhances performance indicators such as return on assets, return on
equity, return on sales, and Tobin' Q.
From a stakeholder theoretic perspective, firms' success is linked to developing good
relationships with stakeholders, acknowledging and addressing societal needs and concerns,
and respecting the mix and values of its community (Jizi, 2017; Foote et al., 2010).
Diversified boards assist in managing stakeholders' expectations in a complex societal setting
(Chapple and Humphrey, 2014). Appointing female directors might advance firms' social
welfare by maintaining and improving firms' relationships with their society and reflect the
demographic attributes of core stakeholder groups (Luckerath-Rovers, 2013). Female
directors consider the interest of multiple stakeholders, demonstrate sensitivity to others’
needs, and enhance board service roles (Mallin and Michelon, 2011). Women on boards
appear to occupy a role of network member and a symbol of change for other women, thus
reflecting a firm's gender equality and fair representation of society (Walls et al., 2012). The
presence of demographic differences on boards and reflecting the diversity in the socio-
economic environment facilitate understanding of the complex business environment and
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respond to the needs of multiple stakeholders (Hillman and Dalziel, 2003; Campbell and
Mingues-Vera, 2008; Bowrin, 2013). This enhanced decision quality is likely to be reflected
on firms’ risk (Colaco et al., 2011). Board effective functioning relates to a board’s collective
expertise and backgrounds; however, the director's impact also affects the public interest
(Forbes and Milliken, 1999). Prior research shows that social and environmental issues are
more of a concern to women than men, which explains women’s encouragement to manage
environmental risk and prefer quality of life to material success (Fukukama et al., 2007;
Hofstede et al., 2010; Liao et al., 2015).
Arguably, women’s behavior on corporate boards differs from that of male directors
(Adams and Ferreira, 2009). The quality of board governance is influenced by the variety of
characteristics of its directors (Tanaka, 2014). Gender behavioral difference in management
explains the changing dynamics when women participate on boards (Dezso and Ross, 2012),
forming a new governance dimension (Liao et al., 2015). Female directors are less self-
interest oriented, more inclined toward sustainable investments, possess better
communication skills, and are more committed than their male counterparts (Coffey and
Wang, 1998; Huse and Solberg, 2006; Charness and Gneezy, 2012). Additionally, women
apply an interactive leadership approach, seek others’ input, share information, and
communicate effectively with subordinates (Tanaka, 2014; Rishani et al., 2015; Kelan, 2016).
They are more collaborative, civilized, and supportive than their male counterparts (Terjesen,
et al., 2009) and more inclined toward participatory and democratic management (Eagly and
Johnson, 1990). In general, female board directors are better prepared for meetings and tend
to ask more questions, which provide new viewpoints and add value to the board discussions
(Farrell and Hersch 2005; Konrad et al. 2008). Adams and Ferreira (2009) find that female
directors not only have better board meeting attendance than male directors, but also
demonstrate greater participation, thus enhancing males' attendance behavior. These
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behaviors exhibit the mechanism underlying the favorable consequences of a gender-diverse
board (Van Knippenberg et al., 2004) and the influence of gender diversity on board
effectiveness (Adams and Ferreira, 2009).
Building on the above points, we argue that, if more women’s participation on boards
enhances board effectiveness and improve firm's governance, whether because they bring
new life experiences and have better understanding than male directors in some business
segments, or because they form a new concept of independent director by not belonging to
the classical male group of directors, firms with more women on boards are expected to have
less risk.
H1: The greater the representation of female directors on the board, the lower the firm risk.
H2: The influence of women’s board participation on firm risk varies across industries.
Our conceptual model is illustrated below:
Research design
Sample
The paper seeks to explore whether women’s participation on the corporate boards of FTSE
350 non-financial firms is related to firms' stock return volatility. We, therefore, examine the
Women on
corporate boards
Higher
transparency and
truthfulness
Different managerial
behavior and life
experiences
Better connections
with society
Reflect gender equality &
demographic attributes of
key stakeholders
Improved governance
Improved relationships
with stakeholders
Lower firm risk
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period from 2008 to 2013 as a balanced sample before and after the issuance of the Davies
report in February 2011. We exclude financial firms to avoid having firms subject to different
types of business risk and operation complexity. This leaves us with an initial sample of
1,423 observations across a six-year period. We use the Bloomberg database to collect data
on the percentage of women on boards, firm stock price volatility, and other variables to
control for board- and firm-related characteristics. After adjusting for missing data, the final
examined sample size is 1,138 observations.
To avoid model misspecification, we control for a set of board- and firm-related
characteristics. Board composition and diligence are known to be key determinants of board
effectiveness. We, therefore, control for board composition and diligence using board size,
board independent directors, board meeting, and chairman dual role. Board size influences
the quality of communication, which in turn reflects board effectiveness and decision-
making. Cheng (2008) finds that larger boards have less variable stock returns, as their final
decisions are less extreme and reflect more discussion before reaching an agreement.
Previous research suggests that board independence is related to positive firm outcomes and
limits the occurrence of earnings management and the opportunity for fraud (see e.g. Dechow
et al., 1996; Christy et al., 2013). However, executive directors might have more inside
information for effective decision making (Ramdani and Witteloostuijn, 2010). A chairman’s
dual role is expected to reduce performance (Carty and Weiss, 2012), as it might indicate
power abuse by CEOs and loss of monitoring. The higher frequency of board meetings
improves communication among board members and has a favorable impact on firm value
(Brick and Chidambaran, 2010).
Another set of variables is used to control for firm characteristics, including return on
assets (ROA), logarithm of total assets, leverage, market-to-book value, and average traded
volume. Firms with high ROA are more resistant to financial problems and external shocks
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(Baek et al., 2004), as profitability reduces spread and compensates investors for further risk-
taking (Flannery and Sorescu, 1996). Large firms might face less stock price volatility, as
they have a greater ability to diversify their investments and access capital markets (Baek et
al., 2004). We control for firm leverage, as it is seen as a tool to manage agency problems and
enhance stock performance (Kochhar, 1996). Jizi and Dixon (2017) suggest that firms’
growth indicators and traded volume influence return volatility. Higher market-to-book value
reflects firms’ potential to undertake new investment opportunities and the sufficient use of
available cash flows, which increase the probability of future returns.
The Model
The below model is used to test the hypothesis:
= + + + + + + + +
+
+
+
[Table 1 is about here]
Table 2 shows that the mean of the percentage of women’s participation on boards during the
examined period is 8.83% with a standard deviation of 9.2% and a maximum women’s board
representation of 50%. Table 3 shows the progression of women’s participation on boards
across the years as the mean increased from 7.7% in 2008 to 10.7% in 2013. While firms
across industries increased women’s representation on their boards post-Davies report, the
variation in women’s presence is more pronounced. The highest percentage of women on
boards is in the utilities industry, followed by consumer goods and consumer services, and
almost half the representation occurs in the energy and basic materials industries. The
reported results suggest that women are more represented on boards in industries
characterized by their close connections to the final consumers, while other sectors such as
energy and basic materials are less connected to final consumers and consequently are more
dominated by male directors (Brammer et al., 2007).
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14
[Table 2 is about here]
[Table 3 is about here]
Table 4 shows that the stocks of firms with women on their boards witnessed higher traded
volume and less return volatility. The lower volatility supports the notion that women’s
representation on boards enhance firms’ market performance; however, no significant
difference is reported regarding firms’ profitability proxied by ROA. Luckerath-Rovers
(2013) argues that women’s representation on boards might be impacted by the limited
number of board seats. Our results show that firms with women on the board have larger
board sizes, which is likely to facilitate the appointment of female directors. In addition,
boards with women’s participation have more independent directors. While ROA and market-
to-book value report no significant differences in their means between the two sub-groups,
firms with women on their boards have higher leverage and larger asset size relative to firms
without women on the boards.
[Table 4 is about here]
Hypotheses testing
In this section, we examine the association of women’s participation on corporate boards and
firms’ stock return volatility. Three measures to proxy for board gender diversity are used to
explore the influence of the existence of women on boards, percentage of women on boards,
and groups of women on boards. The second set of regressions aims to identify whether
women’s influence on firm volatility differs across industries. Table 5 illustrates the
Spearman correlation matrix and the VIF test, suggesting no serious multi-collinearity in our
regressions. As we exclude the financial sector, we are left with nine industry groups relating
to FTSE 350 firms. White robust standard error is applied to adjust for any
heteroskedasticity.
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[Table 5 is about here]
In our first hypothesis, we presume that women’s participation on corporate boards has
positive consequences on firm risk. We test this hypothesis using three different measures of
women’s participation on boards, as illustrated in Table 6. Our results show that both the
participation of women and the percentage of women on boards are negatively associated
with stock volatility and are statistically significant. This suggests that gender difference
brings a new voice and monitoring behavior that reflects a board’s effective functioning. The
business environment is in continuous change (Adams and Ferreira, 2009) and addressing the
changing business needs using the traditional set of solutions is likely to limit quality decision
making. Boards’ fiduciary duties seem to be more successfully addressed when women
participate in the decision-making process. The participation of women on boards presumably
brings a new way of thinking, management style, life experiences, networks, and information
(Eagly and Johnson, 1990; Terjesen et al., 2009; Mallin and Michelon, 2011; Dezso and
Ross, 2012; Shi et al., 2017).
According to group dynamics, two or more female directors are more likely to
cooperate and have better power to promote their perspectives. To test whether having group
of female directors, rather than merely appointing one female director to appease public
pressure, is more effectual in reducing firm stock return volatility, we construct a dummy
variable, giving a value of one if two or more female directors are on the board, and zero
otherwise. Column 3 Table 6 shows that the coefficient of groups of women on boards
variable is larger than the coefficient of women on board dummy. This indicates that having
groups of female directors exhibits higher capacity to communicate and promote their views.
This is in line with the finding reported in Column 1 Table 6 showing that the greater the
percentage of women representation, the more the reduction in stock return volatility was
seen.
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If female directors bring to board discussion new insights and life experiences on one
hand (Carter et al., 2003; Erhardt et al., 2003) and have better understanding of some market
segments and connections with key stakeholder groups on the other hand (Singh and
Vinnicombe, 2004; Daily et al., 1999; Mallin and Michelon, 2011), one might argue that
women’s participation on boards might not have a similar influence on stock volatility across
all industries. To test this theory, we introduce the interaction variables between the dummy
variable representing the presence of women on boards and the industries’ dummy variables.
Column 4 in Table 6 shows that women on the boards of four out of nine industries are
negatively associated with stock return volatility. We find that female representation on the
corporate boards of consumer goods, consumer services, health care, and utility firms is
favorable. Our results suggest that firms with a relatively high percentage of female
workforce in close proximity to customers and/or serve high percentage of females (Brammer
et al., 2007) benefit more from women participation on their corporate boards. This finding
supports the argument that female directors are more knowledgeable than male directors in
some business segments and/or markets and their voices bring to the board the needs of a
demographic group of stakeholders (Luckerath-Rovers, 2013; Bowrin, 2013; Singh and
Vinnicombe, 2004; Smith et al., 2006). Therefore, gender-diverse boards in firms with close
proximity to consumers benefit from women’s collective experiences and backgrounds as
well as their ability to respond to the needs of multiple stakeholders to enhance their
functioning and the quality of decision-making process, which in turn reduces stock return
volatility.
[Table 6 is about here]
Robustness testing
To validate our results, we conduct additional testing for robustness. We employ firm-year
fixed-effect regression to eliminate any unobservable heterogeneity among observations in
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the examined sample and to control for the possibility of omitted unobservable firm
characteristics (Campbell and Minguez-Vera, 2008; Adams and Ferreira, 2009). Reverse
causality might also be of concern. Firm performance might affect firms’ interest in
appointing a female director, and on the other hand, a female director might decline a board
seat in a poor-performing firm. We control for this issue by running a regression with one-
year lead volatility, as the performance of a given year might affect and/or be affected by
women on board, but the volatility of a lead year might not affect women’s participation in
the previous year. Consequently, we omit the possibility of reverse causality. In addition,
reverse causality is controlled by running the regression with one-year lagged volatility. The
introduction of one-year lagged volatility assists in controlling for endogeneity that might
result from having prior-year volatility affecting board diversity; however, adding one-year
lagged volatility as an explanatory variable increases the problems with autocorrelation
(Dezso and Ross, 2012). Therefore, to account for autocorrelation and the existence of
endogenous variable, we use the one-step Arellano and Bond estimates of the specification
and Generalized Method of Moments (GMM) (Arellano and Bond, 1991; Adams and
Ferreira, 2009; Dozso and Ross, 2012; Gippel, Smith and Zhu, 2015).
It is well known that coming up with a valid instrumental variable is challenging,
particularly in the governance-performance context (Adams and Ferreira, 2009). The
variables that are supposed to correlate with the endogenous variable are in general other
governance variables, which are either included in the model or should be added into the
regression. Therefore, we aimed at selecting a variable which is not identified yet in the
previous literature as a determinant of volatility. Hence, two instrumental variables are
constructed. We consider the issuance of the Davies report in February 2011 as an exogenous
shock to FTSE firms in general. Hence, we constructed the first instrument as a dummy
variable that gives a value of one for observations post-Davies report and zero otherwise. The
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18
second instrument is a dummy variable that gives a value of one if the firm is listed in
FTSE4Good (an index grouping firms that meet socially responsible standards) and zero
otherwise. Socially responsible firms are considered less risky, as they are perceived to be
better managed (McGuire et al., 1988), more connected with stakeholders, and less subject to
adverse reaction when facing negative events (Godfrey, 2005). Hence, FTSE4Good may
control for firms’ unobservable omitted factors. The Hansen test of over-identification
restrictions reported results confirming the validity of the used instruments.
Table 7 shows that women’s participation on boards is statistically significant and
negatively impacts stock return volatility. These results are in line with the results reported in
Table 6. The results of regression (2) with a one-year lead volatility as a dependent variable
show that our results are not affected by reverse causality. Women’s participation on boards
remains statistically significant and negatively influences the stock return volatility of the
following year. Similar quantitative results are obtained when employing Arellano and Bond
and when instrumental variables are used. The one-year lagged volatility is not significant,
and women’s percentage of board representation negatively impacts firms’ volatility and is
statistically significant.
In unreported results, we replace the percentage of women on boards with the board
diversity dummy variable and the group women dummy variable and re-run the equations in
Table 7 to estimate relationships. The results are largely consistent with those reported.
[Table 7 is about here]
Conclusion
The business environment is in continuous change, and addressing changing business needs
using a traditional set of solutions is likely to limit quality decision making. With the
changing business environment and the increasing complexity of corporations and market
needs, there is growing attention to the importance of appointing female directors on
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19
corporate boards to facilitate effective board functioning (Adams and Ferreira, 2009). Some
European countries have introduced board gender quotas to facilitate women’s participation
on corporate boards. The UK has opted to encourage women’s board participation voluntarily
by setting a 25% gender target through the Davies report on one hand, and on the other hand
by emphasizing in the UK corporate governance code (2014) the importance of women’s
participation for effective board functioning. Enhancing women’s representation on boards is
not initiated for purposes of women’s rights, but rather driven by the favourable
consequences female directors can have on firms' performance and decision quality. Moving
from the traditional all-male boards to gender-diverse boards aims at utilizing a larger pool of
skills and improving business and the economy at large. This influence is attributed to several
behavioral and managerial aspects as well as having different life experiences and social
networks (Brammer et al., 2007; Trejesen et al., 2009; Dezso and Ross, 2012; Liao et al.,
2015).
In recent years, board gender diversity has received increasing interest. Several
studies have been conducted to address different aspects of women’s board representation.
Our study seeks to provide empirical evidence on the relationship between board gender
diversity and firm risk, which might be of value to policy makers and businesses. The paper
provides evidence from the UK, reflecting the response to a voluntary board gender target
contrary to some other European countries where quota laws are enforced. Additionally, we
explore the effect of women’s board participation on stock return volatility on different
industry levels, showing that firms do not similarly benefit from women’s participation on
boards. This can be useful to policymakers to avoid passing laws that treat likely all
organizations similarly, irrespective of their unique attributes. Furthermore, the study
supports the “comply and explain” approach of the 2014 UK corporate governance code in
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20
encouraging board gender diversification, rather than following a compulsory approach as in
other European countries.
We find that women’s participation on boards is negatively associated with stock
volatility, suggesting that board fiduciary duties seem to be more successfully addressed
when women participate in the decision-making process. This is in line with prior studies
(e.g. Lenard et al., 2014; Sabatier, 2015), reporting a favorable consequence to gender-
diverse boards on firms' performance. Unlike Joecks et al. (2014), who argue that women’s
participation on boards adversely affects firms' performance unless their participation exceeds
30%, we show that both the existence and the percentage of women on boards reduce risk,
and the higher the participation, the higher the influence. However, we agree with the
“critical mass” argument by Joecks et al. (2013), as our results indicate higher risk reduction
when a group of female directors participates on the board compared to the existence of a
female director or the percentage of women on the board. Additionally, the reported results
appease the fear of female directors over monitoring (e.g. Adams and Ferreira, 2009), as they
are more risk averse and independent from management (Srinidhi et al., 2011).
Our results support the ideas offered by previous literature claiming that female
directors bring to boardrooms new insights, management style, life experiences, networks,
and information (Eagly and Johnson, 1990; Terjesen et al., 2009; Mallin and Michelon, 2011;
Dezso and Ross, 2012). Accordingly, new input and ways of thinking out of the homogenous
board box to address the contemporaneous business challenges and enhance board risk
consideration are provided. That is, gender diversification is likely to provide boards with
resources and skills that facilitate achieving optimal decisions and reduced risk.
Alternatively, passing a gender quota that modifies the composition of boards across all
industries might backfire (Adam and Ferreira, 2009). The results show that some industries
attributed by the high percentage of female workforce, close proximity to customers, and/or
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21
high percentage of females (i.e. consumer goods, consumer services, health care, and
utilities), women board participation is more influential on stock return volatility. This
suggests that firms with close proximity to consumers are encouraged to appoint women to
their boards to benefit from their collective experiences. Also, gender-diverse boards are
likely to benefit from women's ability to address the needs of multiple stakeholders to
enhance their functioning and the quality of decision-making process, which in turn reduces
stock return volatility.
Our study examines women’s participation on corporate boards and reports its
association with stock return volatility. It would be of interest in future research to conduct an
event study examining the stock reaction to the addition of a female director on a board.
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22
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Table 1. Variables Definitions
Variable name Variable descriptions
Volatility (VOL) The standard deviation of the daily logarithmic price movements
Women on Board (WB) Three measures are used:
- A dummy variable to indicate if the board is gender diversified or not: A
value of one is given if at least one female director is on board and zero
otherwise.
- A dummy variable to proxy for the existence of a group of female
directors: A value of 1 is given if two or more female directors are
appointed and zero otherwise.
- The percentage of women on board by computing the number of female
directors on the board to the total number of board directors.
Board Independence (BI) The number of independent directors on the board to the total number of
directors
CEO Duality (CEOD) A dummy variable: 1 if the chairman of the board of directors is also the
CEO and 0 otherwise
Board Size (BS) The number of directors on the board
Board meetings (BM) The number of board meeting held in a corresponding year
Log Assets (LOGA) The logarithm of total assets in the corresponding year
ROA Net income over total assets
Leverage (Lev) Debt to total assets
Market-to-Book (MtoB) The market value of equity to book value of equity
Average traded volume
(ATV)
The logarithm of total number of shares traded on referenced time divided
by the number of days in reference period.
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Table 2. Descriptive statistics
Volatility
Women n Board
Board
independence
Board Size
CEO duality
Board Meetings
Firm size
ROA
Leverage
Market-to-book
value
Average traded
volume
Mean 37.84 8.83
54.42
9.22 0.25 8.75 9.28 0.08 0.63 3.62 13.99
Median 34.29 9.10
55.56
9 0 8 9.21 0.06 0.61 2.06 13.98
SD 16.85 9.20
12.30
2.45 0.15 2.74 0.72 0.14 0.50 15.12 1.49
Skewness 1.47 0.88
0.00 0.90 6.15 1.70 0.49 5.23 12.80
7.38 -0.20
Minimum 6.23 0 10 5 0 2 7.41 -0.79
0.01 -
119.66
6.91
Maximum
157.88
50 100 20 1 33 11.56
1.84 11.15
254.51
19.59
Table 3. Percentage of women on board per year across industries
Industry 2008
%
2009
%
2010
%
2011
%
2012
%
2013
%
Across years
%
Energy 8.08 6.60 3.77 3.34 5.20 5.20 5.29
Basic materials 8.20 4.40 3.96 3.94 5.86 5.94 5.40
Industrial 4.00 4.98 5.62 5.43 7.83 8.01 6.13
Consumer goods 7.88 9.67 11.00 12.62 13.68 15.85 11.98
Health care 11.12 10.40 8.88 8.54 14.70 14.33 11.34
Consumer services 8.86 11.51 11.40 12.39 13.72 14.41 12.15
Telecom 6.51 9.33 10.23 10.74 12.57 12.31 10.26
Utilities 6.33 11.68 13.03 13.70 14.93 16.44 12.84
Technology 13.56 4.95 5.64 6.73 8.91 9.53 8.04
Across industries 7.70 7.80 7.90 8.31 10.16 10.70 8.83
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Table 4. Differences in mean and median between firms with and without women on board.
The asterisks ***, **, * denote significance at the 1%, 5%, and 10% level,
respectively.
Variable Firms without women on board
Firms with women on board Diff. in mean
n Mean Median n Mean Median (t-value)
Volatility 503
40.55 35.97 704
35.21 31.89 5.40***
Board size 520
8.21 8.00 711
9.94 10.0 -13.64***
Board independence 530
51.69 50.0 731
56.38 55.56 -6.98***
Board meetings 514
8.63 9.00 698
8.84 8.00 -1.33
ROA 523
0.08 0.06 725
0.08 0.06 -0.04
Leverage 524
0.57 0.55 725
0.67 0.64 -3.16***
Asset size 524
9.05 9.00 725
9.52 9.49 -12.67***
Market-to-book value 530
2.81 1.98 731
4.03 2.32 -1.55
Average traded volume
503
2,140,691
963,236 704
5,825,696
1,899,458
-5.25***
Table 5. Spearman correlations matrix
Variables
VIF
WB
BS BI CEOD
BM
ROA
Lev LOGA
M-to-B
ATV
WB 1.28
1.00
BS 1.76
0.23* 1.00
BI 1.28
0.19* 0.14* 1.00
CEOD 1.05
0.04 0.04 0.01 1.00
BM 1.07
-0.02 -0.11* -0.07*
-0.01 1.00
ROA 1.60
0.02 -0.04 -0.04 0.02 -0.11*
1.00
Lev 1.44
0.18* 0.07* 0.06
*
-0.06 0.06* -0.20* 1.00
LOGA 2.67
0.28* 0.58* 0.33
*
-0.01 -0.08*
-0.27* 0.19*
1.00
M-to-B 1.04
0.10* -0.06* 0.01 -0.02 -0.04 0.37* 0.14*
-0.17*
1.00
ATV 1.75
0.19* 0.42* 0.26
*
-0.03 -0.02 -0.02 0.12*
0.51*
0.20* 1.00
* p < 0.05
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Table 6. Women board representation and firm risk
Table 6 examines the influence of women representation on corporate boards on firm risk. The
dependent variable is stock return volatility. Details on all variables are provided in Table 1. Robust
standard errors are computed following White (1980) to account for any possible heteroskedasticity.
The asterisks ***, **, * denote significance at the 1%, 5%, and 10% level, respectively.
Independent variables Volatility Volatility Volatility Volatility
(1) (2) (3) (4)
Percentage of women on board -0.23***
(0.000)
Women on board (dummy) -3.74***
(0.000)
-3.05***
(0.001)
Group women on board
(dummy)
-4.77***
(0.000)
Board size -0.26
(0.164)
-0.15
(0.421)
-0.15
(0.434)
-0.01
(0.965)
Board independence
-
0.001
(0.995)
0.002
(0.928)
-
0.01
(0.791)
0.01
(0.854)
CEO role duality -3.21*
(0.094)
-3.58*
(0.64)
-3.10
(0.109)
-3.49*
(0.061)
Board meetings 0.08
(0.600)
0.13
(0.386)
0.05
(0.752)
0.04
(0.792)
ROA -9.87***
(0.004)
-9.43***
(0.006)
-10.17***
(0.002)
-9.45***
(0.004)
Leverage 0.94
(0.168)
0.97
(0.172)
0.78
(0.224)
0.90
(0.171)
Asset size
-3.49***
(0.000)
-3.41***
(0.000)
-3.71***
(0.000)
-3.19***
(0.000)
Market-to-book value 0.014
(0.521)
0.01
(0.509)
0.01
(0.724)
0.01
(0.559)
Average traded volume
1.97***
(0.000)
1.84***
(0.000)
2.03***
(0.000)
1.96***
(0.000)
Women on Board * Energy
-
1.64
(0.534)
Women on Board * Basic
material
0.11
(0.970)
Women on board * Industrial -0.89
(0.720)
Women on board * Consumer
goods
-8.71***
(0.002)
Women on board * Health
care
-9.90***
(0.005)
Women on board * Consumer
services
-4.69***
(0.003)
Women on board * Telecom -0.77
(0.780)
Women on board * Utilities
-4.71***
(0.005)
Intercept
37.34***
(0.000)
37.16***
(0.000)
37.52***
(0.000)
32.41***
(0.000)
Industry Dummies Yes Yes Yes Yes
Year Dummies Yes Yes Yes Yes
Adj. R-Squared 0.447 0.443 0.444 0.455
Number of observations
1138
1138
1138
1138
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Table 7. Additional testing on women board representation and firm risk
Table 7 examines the influence of women representation on corporate boards on firm risk. In the first
equation we run a firm-year fixed effect panel regression, in the second equation we introduced one-
year lead volatility and in the third equation we run Arellano-Bond dynamic panel data estimation.
The fourth and fifth equations we employ GMM and we use Davies dummy variable in GMM (1) and
FTSE4Good dummy in GMM (2) as instrumental variables. Robust standard errors are computed
following White (1980) to account for any possible heteroskedasticity. The asterisks ***, **, *
denote significance at the 1%, 5%, and 10% level, respectively.
Volatility Lead Arellano- Volatility Volatility
(Firm-Year
F.E.)
Volatility Bond
GMM (1) GMM (2)
Percentage of
women on board
-0.21**
(0.048)
-0.20***
(0.000)
-0.21*
(0.055)
-0.45***
(0.001)
-7.90**
(0.018)
Board size 0.04
(0.935)
-0.14
(0.534)
1.10**
(0.033)
-1.34
(0.635)
-0.24
(0.755)
Board independence -0.01
(0.977)
0.03
(0.427)
-0.06
(0.345)
0.12
(0.210)
0.08
(0.423)
CEO role duality 4.95
(0.223)
-2.76
(0.134)
-2.23
(0.678)
-3.55
(0.587)
-5.57
(0.408)
Board meetings 0.26
(0.393)
-0.03
(0.834)
0.37
(0.157)
0.88**
(0.016)
0.76**
(0.032)
ROA -24.46***
(0.000)
-8.25
(0.126)
7.25
(0.267)
-28.48***
(0.000)
-28.57***
(0.001)
Leverage 1.09
(0.350)
-0.68
(0.430)
73.64***
(0.000)
1.61
(0.287)
1.73
(0.265)
Asset size -5.21*
(0.061)
-3.72***
(0.000)
-74.16***
(0.000)
-9.35***
(0.003)
-10.42***
(0.001)
Market
-
to
-
book
value
-0.07***
(0.005)
0.01
(0.815)
-
0.032
(0.281)
-
0.5
(2.42)
-
0.05
(0.200)
Average traded
volume
6.92***
(0.000)
1.44***
(0.001)
0.01***
(0.000)
7.64***
(0.000)
7.27***
(0.000)
Volatility (t-1) 0.02
(0.468)
Intercept -10.10
(0.778)
68.48***
(0.000)
674.01***
(0.000)
11.56
(0.692)
29.93
(0.308)
Industry Dummies
Yes
Yes
Year Dummies Yes Yes
Adj. R-Squared 0.053 0.402
Number of
observations
1138
935
706
1138
1128
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