Role of gender and corporate risk taking

• DOI: https://doi.org/10.1108/CG-10-2018-0313
• Pages: 383-399
• Published date: 10 February 2020
• Date: 10 February 2020
• Author: Dene Hurley,Amod Choudhary
• Subject Matter: Corporate governance,Strategy

Role of gender and corporate risk taking

Dene Hurley and Amod Choudhary

Abstract

Purpose –The purpose of this study is to examine therole of chief financial officers’ (CFOs’) gender in

financialrisk taking of 58 US companies along with the impactof having women board members.

Design/methodology/approach –Using a panel data of 58 selected S&P 500 companies during the

period 2012-2016, this paper determines whether the gender of CFOs and having women board

membersplay a role in risk-taking behavior of firms.

Findings –Firms led by female CFOs are smaller in size with lower net income and net revenue. The

panel data analysisshows that the impact of female CFOs on firms’ financialrisk is mixed, depending on

risk measuresused, whereas increasing femaleboard members reduces thatrisk.

Research limitations/implications –The data used is limitedto 58 S&P 500 companies, and two of the

three risk-taking measures used in the study, specifically investment in property, plant and equipment

(PPE) and debt/equityratio, may not be applicable to some industries.

Practical implications –The findings provide mixed evidenceof risk aversion by females in executive

and leadership positions, dependingon the measures used and the management responsibilities they

undertake(CFO versus board member) with support for the glass cliff phenomenonin which females may

be leadingfinancially precarious organizations.

Social implications –Female CFOs are found to be leading relatively smaller and financially poor-

performing firms compared with the male CFO-led firms, thereby giving support to the glass cliff

arguments.

Originality/value –The paper examines the role of CFOs’ gender and board diversityin risk taking as

measuredby the investment in PPE, debt/equity ratioand stock return volatility.

Keywords Board of directors, Risk taking, Glass cliff, Gender, Chief f‌inancial off‌icer

Paper type Research paper

1. Introduction

There has been a growing interest in analyzing gender differences in management styles

and decision-making. This has followed a rise in the number of females going to business

schools, entering the workforce and their steady climb up the management ladder.

McGregor (2017) reports that the number of female chiefexecutive officers (CEOs) reached

a record high of 32 (6.4 per cent) at Fortune 500 companies in 2016 compared with 24

companies in 2014. Similarly, Zwirn (2016)points out that females make up 13.8 per cent of

the Fortune 500 companies’ chief financial officers (CFOs) in 2015, compared with 6.8 per

cent in 2006. Additionally, in 2015,females occupied 19.9 per cent of the board seats of the

Fortune 500 companies compared with 9.6 per cent in 1996 (Catalyst, 2015;Brown, 2017).

With this slow but gradual rise in gender diversity in senior management ranks, there has

been continued interest in determining whether there are differences in risk-taking behavior

between male and female leaders.

Financial decision-making in firmsinvolves risks and uncertainties. The stereotypical view is

that female managers are generally more risk-averse than male managers. The reasons

given range from female’s stronger emotional reactions to uncertain situations and

avoidance of negative outcomes to male managers’ appraisal of risky ventures as a

challenge (Brody, 1993;Larkin and Pines, 2003). It has also been argued that female

Dene Hurley and

Amod Choudhary are both

based at the Department of

Economics and Business,

Lehman College, Bronx,

New York, USA.

Received 3 October 2018

Revised 26 February 2019

4 June 2019

31 December 2019

12 January 2020

Accepted 20 January 2020

The authors thank the

anonymous reviewers for their

review of our manuscript and

their many valuable insightful

comments and suggestions.

The authors also thank their

colleagues N. Papanikolaou

and A. Nunez-Torres for their

assistance with the model

estimation.

DOI 10.1108/CG-10-2018-0313 VOL. 20 NO. 3 2020, pp. 383-399, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 383

managers view risky ventures as a threat (Croson and Gneezy, 2009;Sitkin and Weingart,

1995), whereas male overconfidencemakes them less risk-averse (Gerdes and Gra

¨nsmark,

2010;Hoelzl and Rustichini, 2005). Yet, as pointed out by Filippin (2016), evidence that

females are more risk-averse remains weak, with gender playing only a small role in

accounting for the variance in risk attitudes and the variances changing depending on the

methodologies adopted. Scheel and Nagelschneider (2015) argued that the stereotypical

view may not necessarily apply to specific groups, and more specifically, male and female

managers are not only found to have similar risk preferences but they also make equal or

similar quality decisions. Huang and Kisgen (2013)pointed out that there have been little or

no studies on the role of gender in corporate finance decisions, despite the growing

representation of female managers at higher management ranks such as CEOs and CFOs.

Limited number of studies on the topic (such as Francis et al.,2013,2015;Freeman-

Williams et al.,2015

;Chen et al., 2016;Graham et al.,2013;Huang and Kisgen, 2013)

together with a lack of consensus by these researchers point to the need for further

investigation and to provide a better and nuanced understanding of gender differences in

financial decisions and thus risktaking in firms.

This paper examines the role of gender in financial risk decisions of CFOs using 58US

companies along with the impact of having females on their boards. Similar to the work by

Huang and Kisgen (2013), and as pointed out by Chava and Purnanandam (2010) and

Frank and Goyal (2007), although both CEOs and CFOs play important roles in financial

decisions, CFOs’ primary responsibilities include determination of where and how to invest

an organization’s resources. Frank and Goyal (2007) and Francis et al. (2013,2015) also

pointed out that CFOs are the main executives (and not the CEOs) who determine the firm’s

financial health. Thus, the CFO’s risk preference generally affects the firm’s financial

decision-making and performance, whereas the CEO’s risk-preferences influence the

broader corporate decisions (Chava and Purnanandam, 2010). Using 58 selected firms,

this research examines differences in decisions of male and female CFOs using three

measures of risk-taking: investment in property, plant and equipment (PPE), debt to equity

(debt/equity) ratio and stock return volatility. Traditionally, investments in R&D, investments

in PPE and taking on debt (leverage) have been consideredas measurements of risk (Coles

et al.,2006

). Although researchers such as Chen et al. (2016)have used R&D as a measure

of risk, we selected PPE, debt/equity ratio and stock return volatility for risk measures

because many industries (such as service sectors) are not R&D-intensive and thus

investment in this area would be low or limited. Overall, PPE investments pose a risk to all

types of firms. A high amount of PPE reduces earnings in the short-term because funds are

invested in capital-intensive activities that may not lead to long-term successfor firms when

the product produced or service provided is not in demand per projections. Similarly, a

higher level of debt is also risky, given that an organization may not be able to pay its

creditors on time that may result in bankruptcy or liquidation. Many researchers, including

Adhikari et al. (2019),Dierker et al. (2019) and Serfling (2014), have used stock return

volatility as the measurement of risk and uncertainty for firms, whereby the higher the

volatility, the riskier the security.

The remainder of the paper is organized as follows. Section 2 provides background

literature on gender differences in risk taking by managers, whereas Section 3 discusses

the data and methodology. Section 4 presents the findings, followed by the paper’s

conclusion in Section 5.

2. Analysis of risk taking: role of gender

Until recently, much of the research on corporate decision-making in finance had focused

primarily on the role played by firm characteristics rather than characteristics of managers

leading these organizations. Researchers such as Adhikari et al. (2019,p.2)have

attributed this to the fact that preference for risk is “an innate personality trait which is

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