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Does the presence of independent and female directors impact firm performance? A multi-country study of board diversity

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Abstract

This study empirically analyzes whether gender diversity enhances boards of directors’ independence and efficiency. Using data from 3,876 public firms in 47 countries and controlling for a wide set of corporate governance mechanisms, we find that firms with more female directors have higher firm performance by market (Tobin’s Q) and accounting (return on assets) measures. The results also suggest that external independent directors do not contribute to firm performance unless the board is gender diversified. These results hold with respect to different estimation models and robustness tests. Overall, our findings provide evidence that the female directors enhance boards of directors’ effectiveness. Finally, we find that firms that are concerned with board independence, and that firms in more complex environments are more likely to have gender-balanced boards.

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Notes

  1. For example, Brickley et al. (1997), Luan and Tang (2007), Florackis and Ozkan (2009), Kim and Lim (2010), Jackling and Johl (2009), and Pombo and Gutiérrez (2011) report a positive relationship between the percentage of independent directors and firm performance. In contrast, Hermalin and Weisbach (1991), Barnhart and Rosenstein (1988), Bhagat and Black (2002), Vafeas and Theodorou (1998), Klein (1998), and Arosa et al. (2010) find that the presence of independent directors does not increase firm value. Moreover, Agrawal and Knoeber (1996), Bebchuk and Cohen (2005), and Shan and McIver (2011) find that independent directors decrease value. Faleye et al. (2011: 177) report that intense monitoring by independent directors may negatively affect firm value, thus “suggesting that the costs of weak advising outweigh the board’s monitoring.” Nguyen and Nielsen (2010) find that the death of an independent director decreases shareholder value. Kang et al. (2007) report mixed results. Still other studies find no significant differences.

  2. Erhardt et al. (2003), Carter et al. (2003), Campbell and Mínguez-Vera (2008, 2010), Carter et al. (2010), Kang et al. (2010), Gul et al. (2011) and Mahadeo et al. (2012) Lükerath-Rovers (2013), Ntim (2013), among others, report a positive relationship between gender-diversified boards and firm performance. Sun et al. (2011) find no association between gender diversity of independent audit committees and the ability to constrain earnings management. Similarly, Kang et al. (2007) find no relationship. The lack of consistent findings may be due to prior studies’ limited and non-harmonized measures of firm performance and lack of control variables. A meta-analysis of over eighty studies finds some support for gender (Post and Byron 2015). A more recent stream of research examines female CEOs and Chairs, finding a positive relationship to performance (Peni 2014).

  3. This model does not include the variable percentage of female directors and the interaction term because they are highly correlated and it is impossible to interpret their segregated effects. The implication of dropping the percentage of female directors from this model is that we do not consider the individual effect of this variable on firm performance, which then leads to an omitted variable problem. The instrumental variable regression model (GMM) solves this problem and the estimated coefficients remain robust.

  4. We thank a reviewer for this suggestion.

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Acknowledgments

We thank Editor Roberto Di Pietra and the three anonymous reviewers for helpful comments on earlier versions.

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Authors and Affiliations

  1. Kelley School of Business, Indiana University, 1309 E. 10th St., Bloomington, IN, 47405, USA

    Siri Terjesen

  2. School of Management & Economics, Lund University, Lund, Sweden

    Siri Terjesen

  3. ISEG-School of Economics and Management, Technical University of Lisbon, Rua Miguel Lupi, 20, 1249-078, Lisbon, Portugal

    Eduardo Barbosa Couto & Paulo Morais Francisco

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Terjesen, S., Couto, E.B. & Francisco, P.M. Does the presence of independent and female directors impact firm performance? A multi-country study of board diversity. J Manag Gov 20, 447–483 (2016). https://doi.org/10.1007/s10997-014-9307-8

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