Board gender diversity and firms’ equity risk

• DOI: https://doi.org/10.1108/EDI-02-2017-0044
• Pages: 590-606
• Published date: 18 September 2017
• Date: 18 September 2017
• Author: Mohammad Issam Jizi,Rabih Nehme
• Subject Matter: HR & organizational behaviour,Employment law,Diversity, equality, inclusion

Board gender diversity and

firms’equity risk

Mohammad Issam Jizi and Rabih Nehme

Adnan Kassar School of Business, Lebanese American University,

Beirut, Lebanon

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. The purpose of this

paper is 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 are 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. The authors 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 favorable influence of board gender

diversity for effective functioning.

Keywords Board gender diversity, FTSE 350 firms, Stock return volatility

Paper type Research paper

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-Vera, 2008;

Adams and Ferreira, 2009; Lückerath-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 provides a better platform for sound governance and quality decision

making (Brammer et al., 2007; Terjesen 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.

Equality, Diversity and Inclusion:

An International Journal

Vol. 36 No. 7, 2017

pp. 590-606

© Emerald PublishingLimited

2040-7149

DOI 10.1108/EDI-02-2017-0044

Received 27 February 2017

Revised 15 August 2017

Accepted 18 August 2017

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/2040-7149.htm

590

EDI

36,7

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. However, the Lord Davies report in 2011 was the first to encourage

FTSE-listed firms to achieve a set target of 25 percent 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-Vera, 2008; Erhardt et al., 2003; Adams and Ferreira, 2009; Dezso and Ross, 2012;

Lückerath-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 policy makers 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 USA and some European countries (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 andremovingbarrierstohelpfirmsachieve

better performance.

In this study, we explore whether women participation on corporate boards has any

significant effect on firm risk measured by stockreturnvolatility.Therelationshipis

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

ahighpercentageoffemales,womenontheboard 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 the third and fourth sections,

respectively. Robustness tests and results are interpreted in the fifth section. The conclusion

is provided in the last section.

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Board gender

diversity