Board of director’s gender diversity and its impact on earnings management: an empirical analysis for select European firms
Abstract
From a corporate governance point of view, this paper addresses the question about how board gender diversity influences managerial opportunistic behavior for solving agency conflicts from a sample of European countries. Specifically, we analyzed indexed non-financial companies from Denmark, Finland, France, Germany, Italy, Norway, Portugal, Spain, Sweden, and United Kingdom for the period 2006–2016. Several panel data techniques are used in the empirical analysis to deal with the endogeneity and heterogeneity problems. To the best of our knowledge our research is novel in the literature by providing a multi-country approach in board gender diversity, as well as considering contextual country variables and the role of the regulatory system as determinants of earnings management.
Our results confirm the benefits of having a balanced board in terms of gender diversity. An equilibrated board tends to mitigate earnings management practices, reinforcing the value of the laws passed in recent decades in Europe. Our analysis reveals that the regulatory framework regarding board gender diversity established by each country has a determinant role in reaching equality in decision-making positions, as a founding value of the European Union. We provide several policy recommendations from our main findings.
Keyword : earnings management, corporate governance, gender diversity, board composition, female quotas
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
Adams, R. B., & Ferreira, D. (2009a). Strong managers, weak boards? CESifo Economic Studies, 55(3-4), 482-514. https://doi.org/10.1093/cesifo/ifp023
Adams, R. B., & Ferreira, D. (2009b). Women in the boardroom and their impact on governance and performance. Journal of Financial Economics, 94(2), 291-309. https://doi.org/10.1016/j.jfineco.2008.10.007
Alonso-Borrego, C., & Arellano, M. (1999). Symmetrically normalized instrumental variable estimation using panel data. Journal of Business & Economic Statistics, 17(1), 36-49.
Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The Journal of Finance, 23(4), 589-609. https://doi.org/10.1111/j.1540-6261.1968.tb00843.x
Arellano, M. (2003). Panel data econometrics. Oxford University Press.
Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equation. The Review of Economic Studies, 58(2), 277-297. https://doi.org/10.2307/2297968
Armstrong, C. S., Guay, W. R., & Weber, J. P. (2010). The role of information and financial reporting in corporate governance and debt contracting. Journal of Accounting and Economics, 50(2-3), 179-234. https://doi.org/10.1016/j.jacceco.2010.10.001
Arun, T. G., Almahrog, Y. E., & Ali Aribi, Z. (2015). Female directors and earnings management: Evidence from UK companies. International Review of Financial Analysis, 39(Supplement C), 137-146. https://doi.org/10.1016/j.irfa.2015.03.002
Baltagi, B. H. (2013). Econometric analysis of panel data (5th ed.). Chichester, UK: John Wiley & Sons Ltd.
Barua, A., Davidson, L. F., Rama, D. V., & Thiruvadi, S. (2010). CFO gender and accruals quality. Accounting Horizons, 24(1), 25-39. https://doi.org/10.2308/acch.2010.24.1.25
Baumgärtner, S. (2006). Measuring the diversity of what? And for what purpose? A conceptual comparison of ecological and economic biodiversity indices. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=894782
Beaton, A. M., & Tougas, F. (1997). The representation of women in management: the more, the merrier? Personality and Social Psychology Bulletin, 23(7), 773-782. https://doi.org/10.1177/0146167297237010
Beck, N., & Katz, J. N. (1995). What to do (and not to do) with time-series cross-section data. American Political Science Review, 89(3), 634-647. https://doi.org/10.2307/2082979
Bergström, C., & Rydqvist, K. (1990). The determinants of corporate ownership: An empirical study on Swedish data. Journal of Banking & Finance, 14(2), 237-253. https://doi.org/10.1016/0378-4266(90)90048-7
Berlin, M., & Loeys, J. (1988). Bond covenants and delegated monitoring. The Journal of Finance, 43(2), 397-412. https://doi.org/10.1111/j.1540-6261.1988.tb03946.x
Bernardi, R. A. (1994). Fraud detection: the effect of client integrity and competence and auditor cognitive style. Auditing: A Journal of Practice & Theory, 13(1), 68-84.
Bernardi, R. A., & Arnold, D. F. (1997). An examination of moral development within public accounting by gender, staff level, and firm. Contemporary Accounting Research, 14(4), 653-668. https://doi.org/10.1111/j.1911-3846.1997.tb00545.x
Betz, M., O’Connell, L., & Shepard, J. M. (1989). Gender differences in proclivity for unethical behavior. Journal of Business Ethics, 8(5), 321-324. https://doi.org/10.1007/BF00381722
Blau, P. M. (1977). Inequality and heterogeneity: a primitive theory of social structure. New York, NY: The Free Press.
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115-143. https://doi.org/10.1016/S0304-4076(98)00009-8
Bond, S. (2002). Dynamic panel data models: A guide to micro data methods and practice. Portuguese Economic Journal, 1(2), 141-162. https://doi.org/10.1007/s10258-002-0009-9
Botsch, E. (2015). The policy on gender equality in Germany. Retrieved from http://www.europarl.europa.eu/RegData/etudes/IDAN/2015/510025/IPOL_IDA(2015)510025_EN.pdf
Byrnes, J. P., Miller, D. C., & Schafer, W. D. (1999). Gender differences in risk taking: A meta-analysis. Psychological Bulletin, 125(3), 367-383. https://doi.org/10.1037/0033-2909.125.3.367
Chapple, L., Dunstan, K., & Truong, T. P. (2018). Corporate governance and management earnings forecast behaviour: Evidence from a low private litigation environment. Pacific Accounting Review, 30(2), 222-242. https://doi.org/10.1108/PAR-09-2016-0081
Cohen, D. A., Dey, A., & Lys, T. Z. (2008). Real and accrual-based earnings management in the pre- and post- sarbanes-oxley periods. The Accounting Review, 83(3), 757-787. https://doi.org/10.2308/accr.2008.83.3.757
Cohn, R. A., Lewellen, W. G., Lease, R. C., & Schlarbaum, G. G. (1975). Individual investor risk aversion and investment portfolio composition. The Journal of Finance, 30(2), 605-620. https://doi.org/10.1111/j.1540-6261.1975.tb01834.x
Dechow, P. M. (1994). Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals. Journal of Accounting and Economics, 18(1), 3-42. https://doi.org/10.1016/0165-4101(94)90016-7
Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. Accounting Review, 70(2), 193-225.
Estes, R., & Hosseini, J. (1988). The gender gap on wall street: an empirical analysis of confidence in investment decision making. The Journal of Psychology, 122(6), 577-590. https://doi.org/10.1080/00223980.1988.9915532
Fallan, L. (1999). Gender, exposure to tax knowledge, and attitudes towards taxation; an experimental approach. Journal of Business Ethics, 18(2), 173-184. https://doi.org/10.1023/A:1005711905297
Francis, B., Hasan, I., Park, J. C., & Wu, Q. (2015). Gender differences in financial reporting decision making: evidence from accounting conservatism. Contemporary Accounting Research, 32(3), 12851318. https://doi.org/10.1111/1911-3846.12098
Gabrielsen, G., Gramlich, J. D., & Plenborg, T. (2002). Managerial ownership, information content of earnings, and discretionary accruals in a non–US setting. Journal of Business Finance & Accounting, 29(7-8), 967-988. https://doi.org/10.1111/1468-5957.00457
García, B., & Gill-de-Albornoz, B. (2007). The effect of the board composition and its monitoring committees on earnings management: Evidence from Spain. Corporate Governance: an International Review, 15(6), 1413-1428. https://doi.org/10.1111/j.1467-8683.2007.00654.x
Gavious, I., Segev, E., & Yosef, R. (2012). Female directors and earnings management in high‐technology firms. Pacific Accounting Review, 24(1), 4-32. https://doi.org/10.1108/01140581211221533
Gormley, T. A., & Matsa, D. A. (2014). Common errors: how to (and not to) control for unobserved heterogeneity. Review of Financial Studies, 27(2), 617-661. https://doi.org/10.1093/rfs/hht047
Greene, W. (2003). Econometric analysis (5th ed.). New Jersey, USA: Prentice Hall.
Gregorič, A., Oxelheim, L., Randøy, T., & Thomsen, S. (2017). Resistance to change in the corporate elite: female directors’ appointments onto Nordic boards. Journal of Business Ethics, 141(2), 267-287. https://doi.org/10.1007/s10551-015-2703-4
Gul, F. A., Fung, S. Y. K., & Jaggi, B. (2009). Earnings quality: Some evidence on the role of auditor tenure and auditors’ industry expertise. Journal of Accounting and Economics, 47(3), 265-287. https://doi.org/10.1016/j.jacceco.2009.03.001
Gull, A. A., Nekhili, M., Nagati, H., & Chtioui, T. (2017). Beyond gender diversity: How specific attributes of female directors affect earnings management. The British Accounting Review, 50(3), 255274. https://doi.org/10.1016/j.bar.2017.09.001
Hassan, O. A. G., & Skinner, F. S. (2016). Analyst coverage: Does the listing location really matter? International Review of Financial Analysis, 46, 227-236. https://doi.org/10.1016/j.irfa.2016.05.008
Hausman, J. A. (1978). Specification tests in econometrics. Econometrica, 46(6), 1251-1271. https://doi.org/10.2307/1913827
Hofstede, G. (1980). Culture’s Consequences: International differences in work related values. London: Sage Publications, the International Professional Publisher.
Hsiao, C. (2007). Panel data analysis−advantages and challenges. TEST, 16(1), 1-22. https://doi.org/10.1007/s11749-007-0046-x
Huang, H. H., Chan, M. L., Chang, C. H., & Wong, J. L. (2012). Is corporate governance related to the conservatism in management earnings forecasts? Emerging Markets Finance & Trade, 48, 105-121.
Huang, J., & Kisgen, D. J. (2013). Gender and corporate finance: Are male executives overconfident relative to female executives? Journal of Financial Economics, 108(3), 822-839. https://doi.org/10.1016/j.jfineco.2012.12.005
Huse, M., & Solberg, A. G. (2006). Gender‐related boardroom dynamics: How Scandinavian women make and can make contributions on corporate boards. Women in Management Review, 21(2), 113-130. https://doi.org/10.1108/09649420610650693
Jensen, M. C., & Meckling, W. (1976). Theory of the firm: managerial behaviour, agency cost and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193-228. https://doi.org/10.2307/2491047
Kaufmann, D., Kraay, A., & Mastruzzi, M. (2011). The worldwide governance indicators: methodology and analytical issues. Hague Journal of the Rule of Law, 3(2), 220-246. https://doi.org/10.1017/S1876404511200046
Krishnan, G. V., & Parsons, L. M. (2008). Getting to the bottom line: an exploration of gender and earnings quality. Journal of Business Ethics, 78(1), 65-76. https://doi.org/10.1007/s10551-006-9314-z
Kyaw, K., Olugbode, M., & Petracci, B. (2015). Does gender diverse board mean less earnings management? Finance Research Letters, 14, 135-141. https://doi.org/10.1016/j.frl.2015.05.006
La Porta, R., Lopez-De-Silanes, F., & Shleifer, A. (1999). Corporate ownership around the world. The Journal of Finance, 54(2), 471-517. https://doi.org/10.1111/0022-1082.00115
La Porta, R., Lopez-De-Silanes, F., Shleifer, A., & Vishny, R. (1997). Legal determinants of external finance. The Journal of Finance, 52(3), 1131-1150. https://doi.org/10.1111/j.1540-6261.1997.tb02727.x
La Porta, R., Lopez-De-Silanes, F., Shleifer, A., & Vishny, R. (1998). Law and finance. The Journal of Political Economy, 106(6), 1113-1155. https://doi.org/10.1086/250042
Leuz, C., Nanda, D., & Wysocki, P. D. (2003). Earnings management and investor protection: An international comparison. Journal of Financial Economics, 69(3), 505-527. https://doi.org/10.1016/S0304-405X(03)00121-1
Lombardo. (2015). Gender equality policies in Spain – update. Retrieved from http://www.europarl.europa.eu/RegData/etudes/STUD/2016/583112/IPOL_STU(2016)583112_EN.pdf
López, F., & Saona, P. (2005). Earnings management and internal mechanisms of corporate governance: Empirical evidence from Chilean firms. Corporate Ownership & Control, 3(1), 17-29.
Martín-Ugedo, J. F., & Minguez-Vera, A. (2014). Firm performance and women on the board: evidence from Spanish small and medium-sized enterprises. Feminist Economics, 20(3), 136-162. https://doi.org/10.1080/13545701.2014.895404
Nielsen, S., & Huse, M. (2010). The contribution of women on boards of directors: going beyond the surface. Corporate Governance: an International Review, 18(2), 136-148. https://doi.org/10.1111/j.1467-8683.2010.00784.x
Numhauser-Henning, A. (2015). The policy on gender equality in Sweden. Retrieved from http://www.europarl.europa.eu/RegData/etudes/STUD/2015/510011/IPOL_STU(2015)510011_EN.pdf
Prat, B., & Mueller, H. (2016). Board-level gender quotas in the UK, France and Germany. News, 14(1), 1-17.
Pucheta Martínez, M. C., Bel Oms, I., & Olcina Sempere, G. (2016). Corporate governance, female directors and quality of financial information. Business Ethics: A European Review, 25(4), 363-385. https://doi.org/10.1111/beer.12123
Reed, W. R., & Webb, R. (2010). The PCSE estimator is good -- just not as good as you think. Journal of Time Series Econometrics, 2(1). https://doi.org/10.2202/1941-1928.1032
Riley Jr., W. B., & Chow, K. V. (1992). Asset allocation and individual risk aversion. Financial Analysts Journal, 48(6), 32-37. https://doi.org/10.2469/faj.v48.n6.32
Roberts, M. R., & Whited, T. M. (2013). Endogeneity in empirical corporate finance. In G. M. Constantinides, M. Harris, & R. Stulz (Eds.), Handbook of the economics of finance (Vol. 2, Part A, pp. 493-572). Elsevier.
Ruegger, D., & King, E. W. (1992). A study of the effect of age and gender upon student business ethics. Journal of Business Ethics, 11(3), 179-186. https://doi.org/10.1007/BF00871965
Saona, P., & Muro, L. (2017). Firm- and Country-level attributes as determinants of earnings management: an analysis for Latin American firms. Emerging Markets Finance and Trade, 54(12), 27362764. https://doi.org/10.1080/1540496X.2017.1410127
Sexton, D. L., & Bowman-Upton, N. (1990). Female and male entrepreneurs: Psychological characteristics and their role in gender-related discrimination. Journal of Business Venturing, 5(1), 29-36. https://doi.org/10.1016/0883-9026(90)90024-N
Shannon, C. E. (1948). A mathematical theory of communication. Bell System Technical Journal, 27(3), 379-423. https://doi.org/10.1002/j.1538-7305.1948.tb01338.x
Sila, V., Gonzalez, A., & Hagendorff, J. (2016). Women on board: Does boardroom gender diversity affect firm risk? Journal of Corporate Finance, 36(Supplement C), 26-53. https://doi.org/10.1016/j.jcorpfin.2015.10.003
Srinidhi, B. I. N., Gul, F. A., & Tsui, J. (2011). Female directors and earnings quality. Contemporary Accounting Research, 28(5), 1610-1644. https://doi.org/10.1111/j.1911-3846.2011.01071.x
Storvik, A., & Teigen, M. (2010). Women on board: the Norwegian experience. Retrieved from https:// library.fes.de/pdf-files/id/ipa/07309.pdf
Thiruvadi, S., & Huang, H. W. (2011). Audit committee gender differences and earnings management. Gender in Management: an International Journal, 26(7), 483-498. https://doi.org/10.1108/17542411111175469
Wintoki, M. B., Linck, J. S., & Netter, J. M. (2012). Endogeneity and the dynamics of internal corporate governance. Journal of Financial Economics, 105(3), 581-606. https://doi.org/10.1016/j.jfineco.2012.03.005
Ye, K., Zhang, R., & Rezaee, Z. (2010). Does top executive gender diversity affect earnings quality? A large sample analysis of Chinese listed firms. Advances in Accounting, 26(1), 47-54. https://doi.org/10.1016/j.adiac.2010.02.008