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E-MailDave (Young Il) Baik is an Assistant Professor at Nanyang Technological University, Clara Chen is the Lillian and Morrie Moss Distinguished Professor in Accountancy at the University of Illinois in Urbana-Champaign, and David Godsell is a PricewaterhouseCoopers Faculty Fellow and Assistant Professor at the University of Illinois in Urbana-Champaign. This post is based on their recent article published in The Accounting Review.
Regulators worldwide are responding to increasing demand for gender diversity on corporate boards by experimenting with policy interventions intended to increase female representation among board directors. In our recent article titled, “Board gender diversity and investment efficiency: Global evidence from 83 country-level interventions”, we catalog, for the first time, 83 country-level board gender diversity (BGD) interventions in 59 countries between 1999 and 2021. The average intervention in our catalog significantly increases female representation on corporate boards. The average post-intervention increase in BGD, measured as the quotient of female board directors divided by the total number of board directors, is 7.3 percentage points.
We employ our novel catalog of 83 board gender diversity interventions to examine the effect of BGD on a first-order firm outcome: investment efficiency. We examine the efficiency of investment because investment is the most important driver of firm value and impacts the broader economy and society, determining both firm and country growth over time.
The effect of BGD on investment efficiency is an open question.
On one hand, BGD can improve investment outcomes by increasing board monitoring, board advisory effectiveness, and board risk aversion as well as two-way communication regarding investment proposals between the board and managers and the board and the investment community.
On the other hand, coordination challenges arising from a more gender-diverse board, a limited supply of female candidates in the board director labor market, and gender tokenism could result in a negative or insignificant effect of BGD on investment outcomes.
To answer the empirical question of how BGD affects investment efficiency, we exploit our BGD intervention catalog to estimate a generalized difference-in-differences model in a large global sample. We document significant increases in investment efficiency among firms affected by BGD interventions, relative to the contemporaneous change in firms unaffected by BGD interventions.
Importantly, we further parse the 83 board gender diversity interventions based on intervention characteristics. Of the 83 interventions, 60 are voluntary, and 23 are mandatory. Of 23 mandatory interventions, 13 are weakly enforced and 10 are strongly enforced. We conduct a series of cross-sectional tests to exploit this heterogeneity in BGD intervention treatment strength.
We document that the effect of interventions on investment efficiency strengthens for firms subject to interventions for which compliance is mandatory. We further document that, within this subset of interventions, the effect of interventions on investment efficiency strengthens for treatment firms subject to strongly enforced mandatory interventions that impose noncompliance penalties on firms and boards. In addition, we partition interventions into those resulting in above- and below-median increases in BGD. We document that the effect of interventions on investment efficiency strengthens for those interventions resulting in above-median BGD increases.
Our inferences make important contributions to both research and practice. First, causal evidence on the effect of BGD interventions on investment outcomes provided in our study should interest policymakers for at least three reasons: (1) investment is a first-order determinant of firm and GDP growth, (2) regulators’ BGD policy experimentation continues, and (3) regulators require plausibly causal inferences to inform evidence-based policymaking. Consequently, our primary inferences meaningfully inform active policy debates. Moreover, our cross-sectional tests exploiting intervention heterogeneity provide nuanced inferences that are particularly likely to help inform policy debates. Our inferences contribute to policy formation by documenting that investment outcomes improve when BGD interventions are mandatory, are strongly enforced, and trigger larger BGD increases. These insights inform and refine the business case for future BGD interventions.
In addition, by cataloging and characterizing 83 BGD interventions in 59 countries between 1999 and 2021 for the first time, Appendix A of our study facilitates future research seeking to document the economic consequences of BGD and related policy interventions. Future work can deploy our catalog of interventions to draw credible inferences regarding the corporate governance consequences of BGD and related policy interventions because (1) the interventions are often exogenous to affected firms (i.e., 23 of 83 interventions are mandatory), (2) it is unlikely that omitted variables correlate with the unique chronological pattern of the 83 government interventions we document, (3) it is simple to identify a credible counterfactual (firms in countries not concurrently adopting an intervention), and (4) heterogeneity across interventions permits robust cross-intervention testing. Taken together, our catalog of 83 interventions in 59 countries facilitates robust research designs with a clear identification strategy that significantly mitigates endogeneity concerns that otherwise threaten the credibility of archival method-based inferences.
The complete article, published in The Accounting Review, is available for download here.
