Does board gender diversity matter? Evidence from hostile takeover vulnerability

• DOI: https://doi.org/10.1108/CG-08-2020-0353
• Published date: 08 March 2021
• Date: 08 March 2021
• Pages: 845-864
• Subject Matter: Strategy,Corporate governance
• Author: Pattanaporn Chatjuthamard,Pornsit Jiraporn,Sang Mook Lee,Ali Uyar,Merve Kilic

Does board gender diversity

matter? Evidence from hostile

takeover vulnerability

Pattanaporn Chatjuthamard, Pornsit Jiraporn, Sang Mook Lee, Ali Uyar and Merve Kilic

Abstract

Purpose –Theory suggeststhat the market for corporate control,which constitutes an important external

governance mechanism, may substitute for internal governance. Consistent with this notion, using a

novel measureof takeover vulnerability primarily based on state legislation,this paper aims to investigate

the effect of the takeover market on board characteristics with special emphasis on board gender

diversity.

Design/methodology/approach –This paper exploits a novelmeasure of takeover vulnerability based

on state legislation.This novel measure is likely exogenous as the legislationwas imposed from outside

the firm. Byusing an exogenous measure, the analysisis less vulnerable to endogeneityand is thus more

likely to showa causaleffect.

Findings –The results show that a more active takeover marketleads to lower board gender diversity.

Specifically,a rise in takeover vulnerability by onestandard deviation results in a declinein board gender

diversity by 10.01%. Moreover, stronger takeover market susceptibility also brings about larger board

size and lessboard independence, corroborating thesubstitution effect. Additional analysisconfirms the

results, including propensity score matching, generalized method of moments dynamic panel data

analysisand instrumental variable analysis.

Originality/value –The study is the first to explore the effect of the takeover market on board gender

diversity. Unlike most of the previous research in this area, which suffers from endogeneity, this paper

uses a novel measure of takeover vulnerability that is probably exogenous. The results are thus much

more likelyto demonstrate causality.

Keywords Corporate governance, Board gender diversity, Female directors, Takeover market,

Market for corporate control

Paper type Research paper

1. Introduction

There are two key governance mechanisms in alleviating agency problems and reducing

the agency costs that are incurred by the principals: external (i.e. the capital market and

regulatory systems) and internal (i.e. the boardstructure, block shareholders and executive

compensation) (Weir et al.,2005;Sinha, 2006). Theory suggests that the market for

corporate control constitutes one of the most crucial external governance mechanisms,

leading to a better alignment of interests between managers and shareholders (Manne,

1965;Fama, 1980;Fama and Jensen, 1983;Mayers et al.,1997;Sundaramurthy, 2000;

Henry, 2004;Lel and Miller, 2015;Cain et al.,2017). The board of directors, on the other

hand, is considered the paramount internal governance mechanism that monitors

managers and reduces agency problems.

There are two competing views with regard to the interaction between external and internal

governance mechanisms: complementarity and substitution. On the one hand, the

Pattanaporn Chatjuthamard

is based at the Sasin

School of Management,

Chulalongkorn University,

Bangkok, Thailand.

Pornsit Jiraporn is based at

Pennsylvania State

University, University Park,

Pennsylvania, USA.

Sang Mook Lee is based at

the School of Graduate

Professional Studies,

Pennsylvania State

University, University Park,

Pennsylvania, USA.

Ali Uyar is based at La

Rochelle Business School,

Excelia Group, La Rochelle,

France. Merve Kilic is

based at Samsun

U

¨niversitesi, Samsun,

Turkey.

JEL classification –G34, J16,

K22

Received 28 August 2020

Revised 16 November 2020

10 January 2021

Accepted 21 January 2021

DOI 10.1108/CG-08-2020-0353 VOL. 21 NO. 5 2021, pp. 845-864, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 845

complementarity hypothesis argues that strong external governance mechanisms (i.e. the

market for corporate control) lead to strong internal governance mechanisms (i.e.the board

of directors) (Lee and Chung, 2016). After a takeover, the members of the boards are likely

to lose their seats and salaries and experience difficulty to find new positions in other firms

(Henry, 2004;Lel and Miller, 2015).The threat of takeover triggers financial and reputational

considerations for the directors, providing additional incentives to discipline and monitor

managers (Cheng et al.,2005;Lel and Miller, 2015) and to build more strong boards. On

the other hand, the substitution hypothesis argues that there is a trade-off between external

and internal governance mechanisms. As the market for corporate control already keeps

managers in line, resulting in fewer agency problems, the board of directors, an internal

governance mechanism, does not need to be as strong as otherwise would be the case.

Hence, this hypothesis suggests that firmsmore susceptible to a takeover are more likely to

have weaker or less effective boards.

Two attributes of the board of directors have dominated the literature on board governance,

i.e. board size and board composition (Brickley and James, 1987;Sundaramurthy, 1996;

Mayers et al.,1997;Cyert et al.,2002;Nahar Abdullah, 2004;Van den Berghe and Baelden,

2005;Cheng et al.,2008;Mishra and Kapil, 2017). While we consider these two impor tant

board characteristics, we focus moreon a crucial, yet less explored, aspect of the board, i.e.

board gender diversity, which has attracted increasingly more attention in the recent

literature. Several studies find those female directors are more effective than their male

counterparts in several manners (Mano–Negrin and Sheaffer, 2004;Konrad et al.,2008;

Adams and Ferreira, 2009;Gul et al.,2011;Srinidhi et al.,2011;Kılıc¸ and Kuzey, 2016;

Papangkorn et al.,2019). Thus, along with smaller board size and stronger board

independence, higher board gender diversity represents a favorable aspect that improves

board effectiveness. This study aims to investigate whether the market for corporate control

(external governance mechanism) complements or substitutes for effective and strong

corporate boards (internal governance mechanism). In particular, this study examines the

influence of takeovervulnerability on board gender diversity.

Based on a large sample of over 10,000 observations across 15years, our results

corroborate the substitution hypothesis, showing that higher takeover vulnerability leads to

larger and less independent boards and, more importantly, to significantly lower board

gender diversity. Our results are not likely influenced by endogeneity as our proxy for

takeover vulnerability is constructed based on exogenous factors beyond the control of any

firm (Cain et al.,2017). At any rate, to further mitigate endogeneity, we execute several

robustness checks, including propensity score matching (PSM), dynamic generalized

method of moments (GMM) panel data analysis and instrumental-variable (IV) analysis. All

the robustness checks confirm the results. It does not appear that our results are vulnerable

to endogeneity.

Our study makes important contributions to the literature. First, we use a novel measure of

hostile takeover activity recently developed by Cain et al. (2017). Prior research shows that

attempts to explore the effect of takeover susceptibility on corporate outcomes largely

suffer from endogeneity problems, which confound any causal inferences. To address this

issue, Cain et al. (2017) developed a hostile takeover index using factors that are plausibly

exogenous to firm characteristics. This is a critical step in addressing endogeneity in the

literature in this area. Our study is amongthe first that uses a proxy for takeover vulnerability

constructed based on exogenousfactors.

Second, we contribute to the strand of the literature that investigates the effect of the

takeover market on corporate policies and outcomes (Kini et al.,1995;Sundaramurthy,

1996;Bertrand and Mullainathan, 1999;Garvey and Hanka, 1999;Giroud and Mueller,

2010;Campbell et al.,2011;Lel and Miller, 2015;Lee and Chung, 2016). We document

robust evidence that the market for corporate control substitutes for board quality. There

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