Women on Board: Does the Gender Diversity Reduce Default Risk?

Abstract

In this study, we aim to provide first comprehensive and robust evidence of the impact of boardroom gender diversity on default risk in Australia and other international markets. Specifically, we answer three key questions: Do women on board reduce default risk? Do women on board reduce default risk through the channel of information asymmetry? Do women on board substitute to either internal or external governance mechanisms? We argue that boardroom gender diversity is likely to have a significant impact on default risk due to the monitoring ability of the women. Specifically, women on board improve the effectiveness of the board in monitoring the opportunistic behaviour of management and mitigating the information asymmetry between management and shareholders and are thus likely to reduce the default risk. Based on the best knowledge of the authors, the research is the first in kind. By using firm data and country data over the period from 2008 to 2013, our preliminary results show that women on board have an overall negative effect on firm’s default risk. These findings are robust to a series of tests, including endogeneity checks, and to alternative proxies for gender diversity and default risk. Moreover, our preliminary empirical evidence supports the role of information asymmetry as a channel of this relationship. Notably, we find that the inverse relationship between gender diversity and default risk is stronger in firms with low ownership concentration, low substantial shareholdings, low product market competition, and high internal governance quality. These findings suggest that gender diversity is a substitute to external governance mechanisms but complementary to internal governance mechanisms. Since the benefit of adding more women on board is under discussion, these findings do not only enrich the regulatory and research debate but also assist investors and firms in designing investment strategies and governance structures respectively. Overall, our preliminary results support the recent calls for more women on corporate boards of Australian firms.