Can Female Directors Improve Performance Consequences of Executives’ External Pay Gap? Evidence from China

Abstract

Drawing on the perspectives of the tournament theory and critical mass theory, the paper investigates the moderating mechanism of female directors’ participation in the board on the relationship between executives’ external pay gap (EEPG) and firm performance. An unbalanced panel data consisting of 21082 firm-year observations from 2783 non-financial listed companies in Shanghai and Shenzhen Stock Exchange of China from 2008 to 2018 is selected as the research sample, and multiple regression analysis, robustness test and endogenous test are taken as the statistical methods. Theoretical analysis and empirical data conclude that EEPG has an inverted U-shaped impact on firm performance, and a mass level of female directors, i.e., exceeding 1/3 in proportion or 3 in number, would change the curve relationship into a positive linear one by enhancing the positive effects and constraining the negative effects of larger EEPG. The paper adds new knowledge to the literature on consequences of female directors and antecedents of firm performance, specifically by providing a comprehensive understanding how and why female directors improve EEPG’s performance consequences.