Additions to Corporate Boards; the Effect of Gender

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Journal of Corporate Finance 11 (2005) 85 – 106 www.elsevier.com/locate/econbase

Additions to corporate boards: the effect of gender
Kathleen A. Farrell a,*, Philip L. Hersch b
a

Department of Finance, University of Nebraska-Lincoln, Lincoln, NE 68588-0490, USA b Department of Economics, Wichita State University, USA Received 1 November 2003; accepted 1 December 2003 Available online 20 April 2004

Abstract During the decade of the 1990s the number of women serving on corporate boards increased substantially. Over this decade, we show that the likelihood of a firm adding a woman to its board in a given year is negatively affected by the number of woman already on the board. The probability of adding a woman is materially increased when a female director departs the board. Adding a director, therefore, is clearly not gender neutral. Although we find that women tend to serve on better performing firms, we also document insignificant abnormal returns on the announcement of a woman added to the board. Rather than the demand for women directors being performance based, our results suggest corporations responding to either internal or external calls for diversity. D 2005 Elsevier B.V. All rights reserved. JEL classification: G30; G34; J16 Keywords: Board of directors; Board composition; Diversity; Gender

1. Introduction Diversity in the workforce has been an issue receiving a tremendous amount of attention both in academia and in the popular press. Much of the initial focus and research relates to impediments to promotion of women at lower and middle management levels, often referred to as a glass ceiling effect. More recently, research has begun to focus on female representation in top management positions and corporate boardrooms (e.g., Kesner, 1988; Bilimoria and Piderit, 1994; Daily et al., 1999; Carter et al., 2003). In the past decade, women have increased their representation on corporate boards of

* Corresponding author. Tel.: +1-402-472-3005; fax: +1-402-472-5140. E-mail address: kfarrell2@unl.edu (K.A. Farrell). 0929-1199/$ - see front matter D 2005 Elsevier B.V. All rights reserved. doi:10.1016/j.jcorpfin.2003.12.001

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directors, but critics argue that overall representation remains low when considering the overall percentage of women in the workforce. Using a panel of approximately 300 unregulated Fortune 1000 firms from 1990 to 1999, we document an increase in the percentage of board seats held by women of the average firm from 5.6% in 1990 to 12.26% in 1999. In addition, in 1999, 87% of corporate boards had at least one woman member compared with 53% in 1990. We find evidence of this increasing representation of women on boards despite a trend in the sample of decreasing board size. The primary goal of this paper is to systematically assess the extent to which gender impacts the selection of a director to serve on the board. We analyze the factors affecting the likelihood of boards adding new directors, either female or male in a given year. An addition to the board may follow the departure of a male or female director, or it may simply represent an increase in board size. Following Hermalin and Weisbach’s (1988) approach to analyzing additions to boards, we specify a Poisson model to analyze the likelihood of women being added to the board. We consider both supply side and demand side determinants associated with the likelihood of women being added to corporate boards. We argue that if diversity is a goal of the firm, then we are more likely to observe an addition of a woman to the board if the number of women on the board is low, even if a director is not being replaced. A diversity goal also predicts that if a female director leaves the board, there is a higher probability that another female is chosen as her replacement. We find evidence consistent with both predictions. Our results strongly indicate that board...
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