ESSAYS ON MANDATING BOARD GENDER QUOTAS AND THE IMPACT ON FINANCIAL REPORTING QUALITY AND FIRM PERFORMANCE

Abstract

These studies examine the role of corporate governance in reducing earnings management. Specifically, the studies focus on introducing a mandatory gender quota for corporate boards in California and examining how that quota affects financial reporting quality and firm performance of firms headquartered in California. Further, the studies examine whether there is a difference in firm performance when a female's presence on the board of directors is mandatory, as in California or voluntarily, as in other U.S. states (e.g., Texas). In September 2018, Senate Bill 826 was introduced in California, mandating a certain number of women on the board of firms headquartered or incorporated in California. The law required firms headquartered in California to have at least one woman on their boards by December 2019. Furthermore, by the end of 2021, the law requires firms to have at least one female director on a four-or-fewer member board, while firms with five board members are required to have at least two female directors. Senate Bill 826 also requires firms with six or more directors are required to have at least three female directors. The first essay examines the effect of the quota mandate on financial reporting quality. Using 293 firm-year observations from 2017 to 2019, the study hypothesizes that the increased representation of women on the board of directors will improve financial reporting quality. However, the results from the study do not support the hypothesis that the change in the gender composition of the board following the introduction of a mandatory quota results in an improvement in financial reporting quality. The second essay investigates the impact of changes in board gender composition on firm performance following the introduction of the quota. Using 896 firm-year observations, the study hypothesizes that quotas are positively associated with firm performance. The findings indicate an insignificant association between firm performance using accounting measure ROA and the increase in female representation following the gender quota mandate. Thus, the results do not support the hypothesis. Also, the study hypothesizes that firms impacted by the gender mandate will have different financial performance relative to other firms. The findings show no differences in financial performance. Thus, the results support the hypothesis.

Keywords: Governance, Financial Report Quality, Discretionary Accruals, Firm Performance, Return on Assets, Gender Diversity