The effect of inside and outside female directors on firm performance: comparison of the First section, Second section, Mothers, and Jasdaq in the Tokyo Stock Exchange Market

Abstract

In recent years, companies in Japan are being encouraged to hire female directors. In 2014, upon the formulation of the “Japan Revitalization Strategy,” the Prime Minister Shinzo Abe said, “we have set a goal that about 30% of leadership positions in the Japanese society be occupied by women by 2020.” The ratio of female board directors in Japan was only 3.4% in 2015, although there has been a gradual increase recently. The purpose of this study is to analyze the effect of female board members on firm performance in Japan; especially, it focuses on the different effects on firm performance of the proportion of the two types of female board members—inside female directors and outside female directors. This paper is the first study to analyze the effect of female board members on firm performance in Japan by considering outside and inside female directors, based on cross-sectional data covering all companies listed in the four sections of the Tokyo Stock Exchange in 2015 (N = 3432). The number of companies in the First section, Second section, Mothers, and Japan Association of Securities Dealers Automated Quotation (Jasdaq) is 1985, 539, 172, and 736, respectively. The empirical analysis uses a two-step least squares method. The theoretical framework is based on the resource-dependence theory, human capital theory, and agency theory, following Carter et al. (Corporate Governance: An International Review 18(5):396–414, 2010). After we carefully control for the endogeneity problem, we find that the ratio of female board members, female inside board members, and female outside board members all have positive effects on the return on equity (ROE) in the First section of the Tokyo Stock Exchange. We conducted a robustness check on dependent variables and an instrumental variable. Even when different performance variables were used, the results were similar to the main results obtained. The effect of the ratio of inside female board members on firm performance is larger than that of the outside female board members.