Does Board Gender Diversity Matter? Evidence From Hostile Takeover Vulnerability

Abstract

Purpose – Theory suggests that the market for corporate control, which constitutes an important external governance mechanism, may substitute for internal governance. Consistent with this notion, using a novel measure of takeover vulnerability primarily based on state legislation, we investigate the effect of the takeover market on board characteristics with special emphasis on board gender diversity. Design/methodology/approach – We exploit a novel measure of takeover vulnerability based on state legislations. This novel measure is likely exogenous as the legislation were imposed from outside the firm. By using an exogenous measure, our analysis is less vulnerable to endogeneity and is thus more likely to show a causal effect. Findings – Our results show that a more active takeover market leads to lower board gender diversity. Specifically, a rise in takeover vulnerability by one standard deviation results in a decline in board gender diversity by 10.01%. Moreover, stronger takeover market susceptibility also brings about larger board size and less board independence, corroborating the substitution effect. Additional analysis confirms the results, including propensity score matching, generalized method of moments dynamic panel data analysis, and instrumental-variable analysis. Originality – Our study is the first to explore the effect of the takeover market on board gender diversity. Unlike most of the previous research in this area, which suffers from endogeneity, we use a novel measure of takeover vulnerability that is probably exogenous. Our results are thus much more likely to demonstrate causality.