When companies increase the number of women on their boards of directors, the investment efficiency of those companies increases, revealed a new report.
The new study published by the American Accounting Association has confirmed that when companies increase the number of women on their boards of directors as a result of government intervention, the investment efficiency of those companies increases. And the more stringent the gender diversity requirements are, the greater the improvements in efficiency.
“We wanted to focus on interventions in which national governments encouraged or required companies to increase the number of women who serve on their boards of directors, because that allows us to focus specifically on the impact that board gender diversity has,” explained David Godsell, corresponding author of the study and assistant professor of accountancy at the University of Illinois.
“If you look solely at correlations between board gender diversity and company performance, it can be difficult to ascertain the extent to which performance is tied to the diversity of the board,” highlighted Godsell. “But by looking at instances where all of the companies in a given nation felt compelled to add women to their boards, we are effectively controlling for competing explanations.”
WOMEN ON BOARDS
For this study, the researchers looked at 83 board gender diversity interventions in 59 countries, between 1999 and 2021. Altogether, they collected data on 35,857 companies. Specifically, the researchers looked at how each company’s investment efficiency changed when an intervention took effect, and compared that to the concurrent change in efficiency for similar companies unaffected by the intervention.
“Investing too much in projects – from capital expenditures to R&D to acquisitions – can be inefficient; investing too little can also be inefficient,” noted Clara Chen, co-author of the study and Lillian and Morrie Moss Distinguished Professor in Accountancy at the University of Illinois. “We found that increased board gender diversity helps companies move toward the ‘Goldilocks’ level of investment – just right.”
“We also found the results were more pronounced when board gender diversity interventions were mandatory, strongly enforced, and resulted in a larger percentage of the board’s seats being held by women,” added Dave (Young Il) Baik, co-author of the study and a PhD. student at Illinois.
GENDER DIVERSITY ON BOARDS
While the US has not conducted board gender diversity interventions at the national level, several states have – including New York, Illinois and California. “In a supplemental analysis, we tested our predictions using the state-level interventions in the US and the results still hold for these interventions,” said Chen. “Therefore, our results are generalisable to the US and provide useful input to policymakers regarding such interventions both around the world and within the US. The findings make clear that improving board gender diversity is simply good for business.
Another benefit of this work” is that we created a resource cataloguing details related to 83 board gender diversity interventions in 59 countries,” shared Godsell. “While we focused on investment efficiency, this resource can be used to explore a host of research questions regarding the effect of BGD on firm outcomes.”
The paper, “Board Gender Diversity and Investment Efficiency: Global Evidence from 83 Country-Level Interventions”, is published in The Accounting Review. Click here to read more.
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