Complementary relationship between female directors and financial literacy in deterring earnings management: The case of high-technology firms

Abstract

We explore whether the presence of female directors on the boards of high-technology firms has an impact on the boards' monitoring and oversight of earnings management. Using difference-in-difference analyses, we utilize an exogenous change in Israel to examine the changes in, and the effects of, female director representation in constraining earnings management in a changing accounting environment that increased managers' ability to report earnings opportunistically. We find that a high representation of women on the board does not make an incremental contribution to the explanation of earnings management over and above the presence of a female director with financial literacy. However, the presence of one financially literate female director on the board does have a significant effect on restraining earnings management. Moreover, financially literate female directors are more effective than their financially literate male counterparts in deterring earnings management. Our results are robust to controlling for firm characteristics related to the selection of a woman to participate on the BOD as well as to the selection of a financially literate woman in particular. We conclude that financial literacy is complementary to female representation on the board in constraining earnings management. An important economic implication of our findings is that a regulatory move to increase the representation of women on corporate BODs should refer specifically to the inclusion of at least one woman with financial literacy on the board.