Empirical Studies on Gender Diverse Boards: Be Aware of the Value Bias in Corporate Debt

Gender Balancing Laws are popular means for regulators to increase the female representation on corporate boards. Norway was among the first countries to introduce a mandatory board gender quota back in 2006 and on September 30, 2018, California became the first U.S. state to introduce similar regulation. The laws are heavily debated and intervene in the corporate governance of firms.

Advocates of gender balancing laws frequently use the business case argument to stress that gender diversity is 'good for business'. Gender diverse firms would show better governance mechanisms and more often promote better talent. Nevertheless, empirical studies in business administration and management seemingly do not support these claims. The earlier studies provide some mixed evidence, more recent studies with more rigorous empirical approaches find negative consequences of gender diverse boards on firms’ profits and equity returns. So, are more gender diverse boards bad for business? Or do those studies miss something?

Our research paper ‘Empirical Studies on Gender Diverse Boards: Be Aware of the Value Bias in Corporate Debt’ addresses these two questions. We focus on the interaction between risk and the value of corporate debt, two important ingredients in firm performance. Using panel data from U.S. firms, we first show robust and positive correlations between more gender diverse boards and the value of corporate bonds. The positive consequences on corporate debt perfectly match the recent evidence on the risk decreasing effect of female board representation and are consistent with a temporary value gain of debt holders at the expense of equity investors from risk shifting.

In a second step, we screen the empirical literature and find that the studies with negative performance effects of more gender diverse boards all neglect the value gain in corporate debt. From the debate on the conglomerate discount, we know that neglecting the risk shifting substantially biases the empirical finding: the so-called Book Value Bias of Debt. This rather surprised us because we know very well for the conglomerate discount literature that the book value bias can easily cause false statistical inferences if it is not properly accounted for.

Using an easy-to-implement correction of the book value bias of debt, we replicate two major studies that find negative performance consequences of gender diverse boards. After adjusting the results for the book value bias of corporate debt, we find that the coefficient in one study turns substantially less negative and in the other study turns statistically non-significant.

Overall, our research attributes a large share of the negative performance effect of gender diverse boards to the measurement bias. The remaining effect on firm performance is (at best) very weak and combined with the robust evidence on the risk-decreasing effect of gender diverse boards, lends more evidence to a positive than to a negative effect of gender diverse boards on firm performance.

Jan Riepe is Assistant Professor of Empirical Banking at the Eberhard-Karls University of Tübingen, Germany.

Philip Yang is Assistant Professor of Strategy and Organization at the Eberhard-Karls University of Tübingen, Germany.