Abstract
We investigate the effect of board gender diversity on managerial risk-taking incentives. Our results demonstrate that companies with stronger board gender diversity provide more powerful executive risk-taking incentives. It appears that female directors’ risk aversion exacerbates managers’ risk aversion, resulting in a sub-optimal level of risk-taking. To offset this tendency for too little risk, companies are induced to provide stronger risk-taking incentives. Specifically, an increase in board gender diversity by one standard deviation raises vega by 10.3%. Further analysis corroborates the results, including propensity score matching, entropy balancing, and an instrumental-variable analysis. Endogeneity appears to be unlikely, suggesting that female directors are not merely associated with, but probably bring about stronger risk-taking incentives.
Highlights
Several recent events have highlighted the importance of board gender diversity
Board gender diversity has attracted a great deal of attention lately due to several of the recent developments that promote gender diversity
We contribute to the literature by exploring the influence of female directors on executive risk-taking incentives
Summary
Several recent events have highlighted the importance of board gender diversity. For instance, the governor of California in 2018 signed a law requiring public companies whose principal executive offices were in California to have at least one female director on the board. Board gender diversity and risk-taking incentives includes only the percentage of female directors on the board.
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