Does Board Gender Diversity Matter? Evidence from Earnings Management, Financial Fraud and Firm Performance

Abstract

This thesis aims to provide further evidence on the importance of independent female directors and their effect on earnings management, financial fraud and firm performance. Both earnings management and financial fraud reflect a lack of transparency of financial reporting, which might mislead investors’ decision-making and can affect firm performance as well. In these following three empirical chapters, we investigate the effect of independent female directors on firms quality of reporting (including earnings management and financial fraud) and firm performance. The empirical evidence of all three chapters is based on data from firms in the United States. Chapter 2 examines the relationship between board gender diversity and earnings management (EM), considering the quality of the board of directors (i.e. experience and expertise) and CEOs entrenchment as moderating factors in such relationship. Our findings show a negative and significant association between board gender diversity and EM, suggesting that independent female directors are the main drivers of such effect. Board quality is significant in influencing the actions of female directors towards EM in companies with less dominant CEOs and high- quality boards. We find that particular quality attributes of female directors do not influence their actions towards earnings management. An exception is the network of female directors, which had a positive and significant estimator, implying that a large network might proxy busyness rather than expertise. Chapter 3 investigates the effect of female directors on financial fraud, focusing on the role of independent female directors and their demographics, such as experience, financial expertise and audit committee membership. The analysis extends to test whether independent female directors might offset actions from powerful CEOs that increase the probability of fraud. The main findings indicate that independent female directors have a negative and significant influence on financial fraud, which is enhanced by their financial expertise and experience. The effect is greater for female directors that are members of the audit committee, reflecting effectiveness in the monitoring function over board of directors’ decisions. Also, the results show that the impact of independent female directors on reducing financial fraud is greater in companies with powerful CEOs, suggesting that they are valuable moderators of negative CEOs actions. Chapter 4 seeks to contribute to the extant literature of the benefits of female directors to firms’ performance. There is an emerging call to enhance diversity in the boardroom, which follows from research that examines the association between firms’ performance and board diversity iv internationally. However, findings of previous studies are still controversial, indicating the need for further evidence. In this context, we aim to summarise the literature that focuses on the impact of female directors on a firm’s performance through a systematic review of relevant literature. Particular attention is placed to whether inconclusive results develop from the estimation methods, including a recent approach (control function), which is proposed by Đặng et al. (2020). The findings indicate a positive association between female directors and a firm’s performance, a conclusion drawn when endogeneity is accounted in the model. The analysis is developed with a sample of US non-financial firms listed in the S&P 1500 from 2000 to 2018. The analysis is followed by an event study in order to examine investor reaction towards firms’ announcements for appointing female directors. Based on the finding, investors seem to not react differently when a director is being appointed regardless of the gender. Chapter 5 provides a general conclusion of all three empirical papers’ findin