The effect of female board representation on the level of ownership in foreign acquisitions

• Published date: 01 September 2022
• Author: Fatemeh Askarzadeh,Krista Lewellyn,Habib Islam,Kaveh Moghaddam
• Date: 01 September 2022
• DOI: http://doi.org/10.1111/corg.12433

ORIGINAL ARTICLE

The effect of female board representation on the level of

ownership in foreign acquisitions

Fatemeh Askarzadeh

1

| Krista Lewellyn

2

| Habib Islam

3

| Kaveh Moghaddam

4

1

Marilyn Davies College of Business,

University of Houston-Downtown, Houston,

Texas, USA

2

Barney Barnett School of Business and Free

Enterprise, Florida Southern College, Lakeland,

Florida, USA

3

Department of Management, Strome College

of Business, Norfolk, Virginia, USA

4

School of Business Administration, University

of Houston-Victoria, Katy, Texas, USA

Correspondence

Fatemeh Askarzadeh, Marilyn Davies College

of Business, University of Houston-

Downtown, One Main Street, Suite B437,

Houston, TX 77002, USA.

Email: askarzadehf@uhd.edu

Abstract

Research Question/Issue: How female representation on corporate boards affects

firm outcomes that have significant implications for stakeholders is a major corporate

governance issue in the 21st century. We examine the effect of female director

representation on acquirers' boards on the level of ownership in foreign acquisitions.

We further test how the relationship is moderated by institutional distance, that is,

the dissimilarities between host and home countries' institutional environments.

Research Findings/Insights: Using a sample of 1118 firm-year observations in

48 countries from 1997 to 2016, we find that greater female representation on

acquiring firms' boards is associated with lower levels of ownership in foreign acquisi-

tions. In addition, we find that only firms with a critical mass of 30% or more women

on the board prefer low ownership. We also find that institutional distance, measured

as the Mahalanobis distance between countries based on the extracted factor of the

regulative institutional profile for each country, magnifies the relationship.

Theoretical/Academic Implications: Using the information economics perspective,

we decompose acquisition risks into ex ante and ex post hazards. Then by integrating

this perspective with gender role theory, we challenge the assumption of unidimen-

sional risk attitudes of female directors. Thus, we contribute to the debate about

how female directors affect firms' strategic choices. Further, our findings provide

unique insights to international corporate governance research that focuses on

how female representation on boards affects firm-level outcomes. In addition, our

finding that institutional difference moderates the effect of female directors

highlights that institutional context should be considered for understanding boards'

strategic roles.

Practitioner/Policy Implications: Board nominating committees should match a firm's

board composition to the desired acquisition strategy with respect to the types of

risk they wish to undertake. The study also highlights the dilemma that female direc-

tors may face in balancing their managerial and gender roles and may assist firms in

better addressing these concerns.

KEYWORDS

corporate governance, female board representation, foreign acquisitions ownership,

institutional distance

Received: 23 June 2020 Revised: 26 January 2022 Accepted: 31 January 2022

DOI: 10.1111/corg.12433

608 © 2022 John Wiley & Sons Ltd. Corp Govern Int Rev. 2022;30:608–626.wileyonlinelibrary.com/journal/corg

1|INTRODUCTION

Around the globe, there are increasing calls from policymakers, share-

holders, and other stakeholders to increase the representation of

female directors on corporate boards (Green, 2019; Terjesen

et al., 2015). Attention to the issue has been driven by desires to

address long-standing gender imbalances on corporate boards

(Zhang, 2012), and by the notable impact, female board representa-

tion has been shown to have on organizational outcomes

(Kirsch, 2018; Terjesen et al., 2016). As societies around the world

strive for and attain gender equality in the 21st century, including on

corporate boards, it is of paramount importance that corporate gover-

nance scholars generate a greater understanding of how board gender

diversity affects firm outcomes.

Because of the potential impact on firm value, acquisitions are

one of the most significant investment decisions that firms make

(Aybar & Ficici, 2009). With globalization and the opening of econo-

mies around the world, foreign acquisitions are an increasingly popular

strategy for pursuing internationalization and revenue growth goals

(James et al., 2020). According to the Institute of Mergers, Acquisi-

tions, and Alliances (IMAA) (2020), in 1989, there were 10,135 acqui-

sitions worldwide; three decades later, in 2018, there were over

49,000 transactions worth $3.37 trillion. Unfortunately, acquisitions

often fail to create value for the acquiring firm (Aybar & Ficici, 2009;

King et al., 2004). High levels of ownership in the acquired firm may

exacerbate the costs of failure for the focal firm (Contractor

et al., 2014). Indeed, the choice between full and partial ownership in

an acquisition reflects the level of control and risk an acquiring firm

undertakes (Chen, 2008; Jakobsen & Meyer, 2008). These alternative

forms of ownership and their determinants have been studied previ-

ously in the literature (e.g., Chen, 2008), but little attention has been

paid to how acquirers' board composition, especially regarding gender,

may affect the level of acquisition ownership.

To address this gap, we employ the mechanisms explicated by

gender role theory (Eagly, 1987) coupled with the information eco-

nomics (IE) perspective (Stiglitz, 2002). Gender role theory addresses

how men and women are expected to behave according to stereo-

types associated with their role (Eagly, 1987). The IE perspective

focuses on the risk of information asymmetry between partners and

postulates that uncertainty associated with asymmetric information

can impact decision-makers' assessments (Stiglitz, 2002). We provide

a more nuanced understanding of how board gender composition

influences ownership choices in foreign acquisitions by integrating

these theoretical perspectives.

A large body of research reveals that men and women may have

different risk preferences (e.g., Byrnes et al., 1999; Croson &

Gneezy, 2009; Elsaid & Ursel, 2011; Jeong & Harrison, 2017). There

is also conflicting evidence regarding the risk preferences of female

directors. For instance, some researchers find that female directors

are risk-averse (Faccio et al., 2016; Huang & Kisgen, 2013), while

others show that women are risk-loving (Adams & Funk, 2012).

Extant literature typically treats acquisition decisions as gender-

neutral. This is unfortunate since risk level is one of the main factors

that decision-makers consider when choosing between engaging in a

full versus partial acquisition (Reuer et al., 2013). Because “acquirers

usually hold worse information than sellers”(Humphery-Jenner

et al., 2017, p. 1688), acquisitions are prone to ex ante adverse selec-

tion risks. Choosing lower ownership levels decreases the conse-

quences of a potential adverse selection and overpayment in an

acquisition attempt. However, with lower levels of ownership, the

chances of opportunistic behavior by the partner result in ex post

relational risk. Since women tend to have superior conflict resolution

and trust-building capabilities (Maddux & Brewer, 2005), we assert

that the relational risks associated with partial acquisitions will be less

of a concern than the adverse selection risks that come with full

acquisitions. Further, female directors who advocate for dealing with

ex post relational risks will be more in line with gender role expecta-

tions from male board members. Therefore, we expect firms with

more female directors will be more likely to undertake partial

acquisitions.

Another gap in the international corporate governance literature

relates to how institutional distance affects the impact female direc-

tors have on organizational outcomes. Given the increasing level of

cross-border transactions since the turn of the century, institutional

distance, defined as the dissimilarities between host and home coun-

tries' institutional environments (Kostova, 1999), is likely to play a role

in shaping ownership structures in acquired firms. Therefore, we also

investigate how the relationship between female board representa-

tion and ownership level in foreign acquisitions is moderated by insti-

tutional distance.

Our analysis of 1118 acquisitions in 48 countries from 1997 to

2016 provides support for our theoretical predictions and contributes

to the growing stream of corporate governance research that studies

how female representation on boards affects important firm-level out-

comes (e.g., Chen, 2011; Chen et al., 2016; Lee et al., 2016; Levi

et al., 2014; Pergelova et al., 2018; Terjesen et al., 2016). Since the

question of how female board members influence foreign acquisition

preferences regarding ownership levels is largely unexplored, our find-

ings that show firms with higher female board representation have

lower ownership levels in foreign acquisitions provide unique empiri-

cal and theoretical insights to international corporate governance lit-

erature. More specifically, our theoretical framework drawing from

gender role theory and the IE perspective reveals that acquisition

decisions are neither gender-neutral nor driven solely by rational risk

assessment.

Our results also provide empirical support for previous studies

that argue that female directors are more effective when there is a

critical mass of female directors on the board. Further, showing that

the institutional distance between home and the host country can

change the impact of female representation on foreign acquisition

ownership levels provides novel insights about situations in which

females' influence on firm decisions is magnified in risk-related con-

texts. Thus, we add to corporate governance literature that stresses

the necessity of considering the institutional context for a compre-

hensive description of boards' strategic roles (Judge & Zeithaml, 1992;

Melkumov, 2009; Zaheer et al., 2012). This is important as it

ASKARZADEH ET AL.609