Post on 10-Apr-2018
Board Diversity and Financial Performance in the Top 500 Australian Firms
Alireza Vafaei, Department of Accounting, La Trobe Business School, La Trobe University
Kamran Ahmed, Department of Accounting, La Trobe Business School, La Trobe University
Paul Mather, Department of Accounting, La Trobe Business School, La Trobe University
Recent regulatory changes in Australia require listed companies to implement policies for increasing board diversity
and to report thereon. In this paper we examine the association between gender diversity on corporate boards and the
financial performance of a large sample of the top 500 listed companies in Australia during the period 2005–2011,
addressing many of the methodological weaknesses in prior studies. Our descriptive statistics show that the proportion
of female directors on boards increased markedly between 2010, when ASX amended principles came into effect, and
2011. The results also show that board diversity is positively associated with financial performance after controlling
for a number of firm-specific, ownership and governance characteristics and potential endogeneity with the two-stage
least square tests. Thus, we inform the policy debate by providing empirical evidence supporting the business case for
board diversity.
The board of directors is the key decision-making
body in a corporation and is responsible for approving important strategic operational and financial decisions (Ferreira 2010). In most countries including Australia, women hold relatively few highly visible decision-making positions (Rubin 2000; Jurkus et al. 2011), although female board membership is in-creasing (Adams and Ferreira 2009). The current debate questions whether or not governments should implement regulations to increase female participation in senior management (e.g., Dale-Olsen et al. 2013). We in-form this debate by examining the association between gender diversity on corporate boards (here after ‘board diversity’) and the financial performance of Australian listed companies.
The advocates for increasing board diversity make ar-
guments that fall into two broad categories: ‘fairness and
equity’ and ‘shareholder value and firm performance’.
Studies that investigate the appointment of women on
boards from a procedural justice perspective (e.g., Mc-
Cann and Wheeler 2011; Brook and Tyler 2011) suggest
that people care about the fairness of decision making
above and beyond the outcomes derived from those de-
cisions (Brook and Tyler 2011). A procedural justice ar-
gument justifies female appointments on the basis that
gender equity is a basic human right. It is about the place
of women in society and the role of the corporate sec-tor
in recognising and supporting them (McCann and
Wheeler 2011). The studies that investigate the appoint-
ment of women on boards from a shareholder value and
firm performance or business case perspective (e.g.,
Erhardt et al. 2003; Carter et al. 2003; Nguyen and Faff
2007; Gul et al. 2013) argue that board diversity
improves organisational value and performance by
providing the board with new vision and perspectives.
Gul et al. (2013: 512) indicate that board diversity leads
to a greater knowledge base, creativity and innovation
and therefore provides higher competitive advantage to
the firm. Consistent with the current drive for gender balance
within corporations in many developed and emerging
countries, the Australian Securities Exchange (ASX)
Corporate Governance Council has made a number of
amendments to its principles and recommendations
(hereafter ‘ASX amended principles’) requiring com-
panies to establish policies for, and increase reporting on,
board diversity (ASX Corporate Governance Council
2010).1 Similarly, the Australian Institute of Company
Directors announced a range of measures encouraging the
appointment of women directors (Australian Institute of
Company Directors 2009) but these have received mixed
reactions, with the structure and capacity of smaller ASX
listed firms to diversify their boards being questioned
(Korporaal 2010). Empirical studies investigating the association
between board diversity and firm financial
performance are inconclusive. For example, some Correspondence: Professor Kamran Ahmed, Department of
Accounting, La Trobe Business School, Faculty of Business,
Economics and Law, La Trobe University, Victoria 3086,
Australia. Tel: +61 3 9479 1125; fax: +61 3 9479 2356; email:
K.Ahmed@latrobe.edu.au
Australian Accounting Review No. 75 Vol. 25 Issue 4 2015 doi: 10.1111/auar.12068 413
Board Diversity and Financial Performance
empirical studies report that a higher proportion of
women in top management have a statistically
significant positive effect on firm performance (Carter
et al. 2003; Erhardt et al. 2003; Bonn 2004; Krishnan
and Park 2005; Nguyen and Faff 2007; Campbell and
Minquez-Vera 2008) while others register a negative
effect (e.g., Adams and Ferreira 2009; Ahren and
Dittmar 2012). Other studies have found no influence on performance by gender diversity in
top management (Shrader et al. 1997; Moncrief et al. 2000; Mohan and Chen 2004; Smith et al. 2006;
Rose 2007; Wang and Clift 2009; Eklund et al. 2009).
The inconclusive findings of prior research,
especially the three Australian studies (Bonn 2004;
Nguyen and Faff 2007; Wang and Clift 2009) may be
due to a number of methodological problems. These
issues include failure to test for reverse causality
(endogeneity), un-observed firm heterogeneity, not
controlling for governance factors affecting firm
performance, relatively small samples and use of a
narrow proxy for performance measures. In this paper, we address the main limitations in
previous Australian studies by utilising a large sample of
the top 500 ASX listed firms over a more recent and
longer time period (2005–2011) by employing multiple
measures of firm performance and board diversity, and by
addressing the endogeneity issue in a systematic way. We
find that board diversity has improved particularly since
2010 in Australian listed firms and there is a positive and
significant association between female non-executives on
boards and firm financial performance. Our study is
timely and contributes to the understanding of the role of
female directors in firm performance by providing
empirical evidence on the expected economic efficacy of
the ASX amended principles. It informs an important
policy debate and should be of interest to regulators,
practitioners and academics. The paper is structured as follows. Section 2 provides a
literature review and hypothesis development. The re-
search methodology, variable measurement and regres-
sion models are presented in Section 3. Descriptive statis-
tics are presented in Section 4, followed by a presentation
of the results and further analysis in Section 5. Section 6
concludes the paper.
Literature Review and Hypothesis Development
Rationales in favour of female appointments are
dominated by business case arguments (see, e.g., Cox and
Blake 1991; Robinson and Dechant 1997; Carter et al.
2003; Gul et al. 2011; Jurkus et al. 2011; Joecks et al.
2013; Gul et al. 2013) with social and procedural justice
arguments (see, e.g., Brooke and Tyler 2011), being less
A. Vafaei, K. Ahmed & P. Mather
prominent (McCann and Wheeler 2011). Carter et al.
(2003) find a significant and positive association be-
tween the percentage of women on the board of directors
and firm performance using a sample of 638 publicly
traded Fortune 1000 firms. Erhardt et al. (2003) find a
positive association between demographic diversity on
boards and accounting measures of performance. Miller
and Triana (2009) find that gender-heterogeneous boards
identify new innovative opportunities and produce higher
quality decisions compared to those that are
homogeneous. Gul et al. (2011), using stock price in-
formativeness as an alternative measure of performance,
report a positive association between gender diversity on
corporate boards and firm performance. Their analysis
suggests that gender diversity improves stock price
informativeness by increasing voluntary public
disclosures in large firms and increasing the incentives
for private information collection in small firms. Other studies (including Smith et al. 2006; Campbel and
Minguez-Vera 2008; Dunstan et al. 2011; Mahadeo et al.
2012; Luckerath-Rovers 2013) also indicate a significant and
positive association between gender diversity and firm
performance. Adams and Ferreira (2009: 291) find that
female directors have better attendance records than male
directors and gender-diverse boards allocate more effort to
monitoring. However, they report on average that gender
diversity has a negative effect on firm performance, which
is, according to them, driven by companies with fewer
takeover defences. Jurkus et al. (2011), using agency
arguments, suggest that female directors are shown as
‘tough’ monitors and find that firms with a greater presence
of female officers have lower agency costs. However, the
negative relation is not robust when considering the
endogeneity of diversity suggesting that endogeneity issues
need to be addressed to derive reliable results. Earlier,
Farrell and Hersch (2005), in a sample of large Fortune 500
firms, failed to find convincing evidence that board gender
diversity is a value enhancing strategy. This is supported by
Lee and James (2007), who report that market reactions to
the announcements of female chief executive officers
(CEOs) are more negative than those of their male coun-
terparts. Haslam et al. (2010) find that women are found on
the boards of companies that are perceived to be performing
poorly and that their presence on boards can lead to the
devaluation of companies by investors in the United
Kingdom. Recent studies such as that by Carter et al. (2010),
using three-stage least squares (3SLS) regression analysis,
indicate no significant association between gender and ethnic
diversity and firm performance, measured by Tobin’s Q and
ROA. Joecks et al. (2013) suggest that the association
between performance and board diversity is not linear as
previously suggested in the literature. They find that gender
diversity initially affects firm performance negatively but
after reaching a critical mass of about 30% firm performance
improves.
414 Australian Accounting Review
C 2015 CPA Australia
A. Vafaei, K. Ahmed & P. Mather
In Australia the results are similarly inconclusive. For
example, Bonn (2004) finds a positive relationship be-
tween the proportion of female directors in 1999 and
market-to-book ratio in a sample of 84 large ASX listed
firms. Later, Nguyen and Faff (2007) investigated the as-
sociation between board diversity (measured by both
dummy and continuous variables) and firm performance
(measured by Tobin’s Q) for a sample of 832 firm-year
observations over the period 2000–2001. Their results
indicate that gender-diverse boards are rewarded with a
value premium as reflected in higher market valuation.
Wang and Clift (2009) indicate no significant association
between gender and ethnic diversity on the board and
financial performance. There are several theoretical arguments (e.g., Pfeffer
1973; Bantel and Jackson 1989; Murray 1989; Carter et
al. 2003) that support board diversity on corporate boards
and assert that board diversity would lead to better firm
performance. For example, Pfeffer (1973), employing
resource dependence theory, argues that incorporation of
diverse constituencies and stakeholders into the board
facilitates the acquisition of critical re-sources for the
organisation. Hillman et al. (2000) based on Pfeffer
(1973) provide a list of benefits with some commonly
observed characteristics of directors and suggest that
different types of directors would provide various
valuable resources to the firm. As a result, a more diverse
board would provide more beneficial resources, which
should produce better firm performance (Carter et al.
2010). Agency theory has also been used to argue that
diversity increases board independence because people
with a different gender, ethnicity or cultural background
might ask questions that would not come from directors
with more traditional backgrounds (Carter et al. 2003).
Later, Jurkus et al. (2011) argue that board diversity
reduces agency costs which, in turn, improve firm
performance, especially for those firms with a weak
governance structure. Overall, drawing on the theoretical arguments
derived from resource dependence and agency theory
as well as the relative weight of prior international
literature dis-cussed earlier, we expect that board
diversity will impact positively on firm financial
performance. Accordingly, we hypothesise that:
H1: The presence of women on corporate boards is
positively associated with firm financial performance. Research Methodology, Variable Measurement and Regression Models
Sample
The initial sample for this study comprised the top 500
ASX listed firms ranked by market capitalisation over
the period 2005–2011 (3500 firm-year observations).
Board Diversity and Financial Performance
Table 1 Sample selection procedure and sample composition by industry Panel A: Sample selection Top 500 ASX listed companies (2005–2010) 3500
Less missing financial data (586)
Less missing corporate governance data (1813)
Total 1101
Panel B: Sample composition by industry
Materials 25.4%
Financials 22%
Industrials 14.2%
Consumer discretionary 11.2%
Energy 10.6%
Consumer staples 4.6%
Health care 4.6%
Utilities 3.8%
Information technology 2%
Telecommunications 1.6%
At 31 December 2003, the top 500 listed companies
represented 95% of the total market capitalisation of the
ASX listed firms (Standard and Poor’s 2004; Wang and
Clift 2009). Therefore, this dataset covers a very large
proportion of the total ASX market capitalisation. Owing
to missing financial data, 586 firm-year observations
were excluded, reducing the sample size to 2914 firm-
year observations. A further 1813 firm-year observations
with missing corporate governance data, including board
diversity, board size and the number of non-executive
directors, decreased the sample size to a final unbalanced
panel of 1101 firm-year observations. Panel A of Table 1
summarises the sample selection procedure. The sources
of data include the Connect 4 Boardroom Review
database for the characteristics of the directors of the top
500 ASX listed firms, the Connect 4 database containing
the annual reports of the top 500 ASX listed firms,
DatAnalysis, which provides company data, market
information and statistics of ASX listed firms, and
Securities Industry Research Centre of Asia Pacific
(SIRCA). The latter is used for collection of two control
variables: block-holder ownership (BHO) and managerial
share ownership. As indicated in Panel B of Table 1, the
highest proportion of sampled firms are from the
materials sector, 25.4%, followed by financials and
industrials at 22% and 14.2% respectively.
Variable measurement
We employ four measures of firm performance to increase the reliability of the results. These are: two accounting-based measures (ROA and ROE), a market-based measure (Tobin’s Q) and an economic-based
measure of firm performance (CFO/TA).2 Accounting-
based measures of firm performance are based on an assessment of how the company has performed in the
C 2015 CPA Australia Australian Accounting Review 415
Board Diversity and Financial Performance
past, while market-based measures indicate the current
position of a company and its potential in the future
(Wang and Clift 2009; Haslam et al. 2010). ROA is
measured by dividing operating earnings by total assets
and ROE is measured by dividing net profit after tax
before abnormals by ordinary shareholders’ equity.
Tobin’s Q is measured as the sum of market value of
equity and book value of liabilities divided by the book
value of total assets at the balance sheet date. This
simple version of Tobin’s Q is applied widely in
Australia (Nguyen and Faff 2007) and elsewhere
(Haslam et al. 2010).3 Finally, following Healy et al.
(1992) and Givoly and Hayn (2000) CFO/TA is
measured by dividing cash flow from operations
(CFO) by total assets at the balance sheet date. Following Jurkus et al. (2011) female membership on
boards is measured by a dummy variable (Div) indicating
their presence and a continuous variable (Divprop),
reflecting the percentage of female directors on the board.
Campbell and Minguez-Vera (2008) and Wang and Clift
(2009) suggest that the mixed evidence on the association
between board composition and firm performance could
be attributed to the omission of other variables that affect
performance. As a result, and consistent with a sub-set of
the extant literature that uses a relatively comprehensive
set of control variables (see, e.g., Ander-son and Reeb
2003; Nguyen and Faff 2007; Adams and Ferreira 2009),
a range of governance and other variables are used as
controls. These are block-holder ownership, managerial
share-ownership, board size, firm age, lever-age, firm
size, proportion of non-executive directors and assets-in-
place. Block-holder ownership (BHO) is defined as share-
holders who own more than 5% of a company’s common
shares (Morck et al. 1988). Managerial share-ownership
(MSO) is the percentage of shares owned by directors at
the reporting date (Short and Keasey 1999). Board size
(BSize) is measured as the natural logarithm of the total
number of directors on the board (Goodstein et al. 1994;
Dalton et al. 1999). Firm age (FAge) is the number of
years the firm has been listed on the ASX (Majumder
1997; Baker and Kennedy 2002). Leverage (Lev) is
measured by dividing the book value of long-term debt by
the market value of equity (Wruck 1990; Henry 2008).
Firm size (FSize) is measured as the natural logarithm of
total assets (Gooding and Wagner III 1985; Smith et al.
2006). The proportion of non-executive directors
(NonExec) is measured by dividing the number of non-
executive di-rectors by the total number of directors on
the board (Pearce and Zahra 1992; Hart 1995; Agrawal
and Knoeber 1996). Finally, assets-in-place is used as a
proxy for the investment opportunity set and is used as an
inverse growth option indicator. Following Zingales
(2000) and Frye (2004), we measure this variable as the
ratio of the sum of inventory, property, plant and
equipment to total assets.
A. Vafaei, K. Ahmed & P. Mather
Regression models
To investigate the association between board diversity and firm performance, we use two measures of board
diversity Divit and Divpropit, and four measures of
firm performance, that is, ROAit, ROEit, Tobin’s Qit
and CFO/TAit. The following regression models are
specified as follows:4
Performanceit = α0 + α1Divit + α2BHOit + α3MSOit
+α4BSizeit + α5FAgeit + α6Levit
+α7FSizeit + α8NonExecit
+α9Asstplcit + α10Yeardummyit
+α11Industrydummyit + εit (1)
Performanceit = α0 + α1Divpropit + α2BHOit
+α3MSOit + α4BSizeit + α5FAgeit
+α6Levit + α7FSizeit+α8NonExecit
+α9Asstplcit + α10Yeardummyit
+α11Industrydummyit + εit (2) where:
Performance it in equations (1) and (2) stands for ROAit,
ROEit, Tobin’s Qit and CFO/TAit. ROA (Return on assets): Ratio of operating earnings to
total assets. ROE (Return on equity): Ratio of net profit after tax
before abnormals to ordinary shareholders’ equity. CFO/TA (CFO-to-assets): Ratio of cash flow from
operations to total assets. Div (Diversity): Dummy variable equal to 1 in the case
of presence of women on the board, 0 otherwise. Divprop (Diversity proportion): Percentage of women
on the board of directors. BHO (Block-holder ownership): Sum of shares owned
by shareholders who hold more than 5% of a
company’s total shares at the reporting date. MSO (Managerial share-ownership): Percentage of or-
dinary shares owned by directors at the reporting
date. BSize (Board size): Natural logarithm of the number of
directors at the reporting date. FAge (Firm age): Natural logarithm of the firm age. Lev
(Leverage): Ratio of long-term debt to market value
of equity. FSize (Firm size): Natural logarithm of the total assets.
NonExec (Proportion of non-executive directors): Ratio of the total number of non-executive directors to total number of directors.
Asstplc (Assets-in-place): Ratio of the sum of inventory,
property, plant and equipment to total assets.
416 Australian Accounting Review
C 2015 CPA Australia
A. Vafaei, K. Ahmed & P. Mather
Descriptive Statistics
Table 2 presents some additional descriptive statistics
indicating the distribution of women on boards in the
sample between 2005 and 2011. The proportion of fe-
male directors to male directors increased from 7.31% in
2005 to 12.26% in 2011 as did the proportion of female
non-executive directors to male non-executive directors,
which increased from 12.42% in 2005 to 18.87% in 2011.
Conversely, the proportion of companies with no female
director on the board decreased from 61.80% to 45.81%
over 2005–2011. Table 2 also shows that the proportion
of female directors on boards increased markedly be-
tween 2010, when ASX amended principles came into
effect, and 2011. Further, following the ASX industry classification,
Table 3 compares the distribution of female directors over
the 10 major industry sectors. Statistics indicate that the
number and percentage of female directors on the boards
of sampled firms varies across the industry sectors over
the sample period. The financials and consumer staples
sectors have the highest number of women directors, with
approximately 11.55% and 10.62% of board members
being female, while women are least likely to be
appointed as directors within the materials (4.05%) and
the energy sectors (4.86%). Table 3 further indicates that
the majority of female directors held non-executive
positions across all industry sectors over 2005–2011. This
ranges from 52.38% of women holding non-executive
positions in the telecommunications services sector to
over 90% of female directors in the financials sector. This
is consistent with the research for the High Pay Centre
and the Guardian, which highlight the lack of women in
executive roles (Neville and Treanor 2012). Table 4 presents a description of the firm
characteristics of the sample. Following prior studies
(e.g., Ahmed et al. 2011), the upper and lower 2% of
three dependent variables including ROA, ROE and
CFO/TA and two independent variables including Asstplc
and Lev, and the upper and lower 10% of Tobin’s Q
(dependent variable) and FSize (independent variable) are
winsorised in order to attenuate the influence of outliers.
The table shows that the mean (median) of ROA, ROE,
Tobin’s Q and CFO/TA are 0.0376 (0.0552), 0.0832
(0.0895), 1.793 (1.404) and 0.0581 (0.0519) respectively.
The standard deviations for these variables do not suggest
significant outliers after winsorisation. The proportion of
female directors ranges from a low of none to a maximum
of 60%, with an average of 6.78%. The percentage of
equity held by block-holders varies between 5% and
100%, with a mean of 39.28%. Managerial share-
ownership ranges from 0% to 99.40%, with an average of
just over 11.25%. The number of directors on boards
ranges from a low of three to a high of 20, with an
average of 7.90. The number of years a company has been
listed on the stock exchange
C 2015 CPA Australia
Board Diversity and Financial Performance
Pe
rcen
tage
of
co
mp
an
ies w
ith
thre
e o
r m
ore
fe
ma
le d
ire
cto
rs
on
bo
ard
(9)
2.0
1%
2.2
9%
3.3
1%
3.3
8%
1.8
1%
2.4
2%
4.3
4%
Pe
rcen
tage
of
co
mp
an
ies w
ith
two f
em
ale
d
ire
cto
rs
on
bo
ard
(8) 8
.54%
9.6
3%
7.4
6
9.7
7%
11.2
7%
10.3
8%
19.0
6%
Pe
rcen
tage
of
co
mp
an
ies w
ith
on
e f
em
ale
d
ire
cto
r
on
bo
ard
(7) 2
7.6
3%
25.6
8%
27.8
0%
27.4
4%
26.1
8%
29.7
5%
30.7
6%
Pe
rcen
tage
of
co
mp
an
ies w
ith
no
fe
ma
le
dire
cto
r
on
bo
ard
(6) 6
1.8
0%
62.3
8%
61.4
1%
59.3
9%
60.7
2%
57.4
3%
45.8
1%
Pro
po
rtio
n o
f
fem
ale
n
on
-exe
cu
tive
dir
ect
ors
(5) 1
2.4
2%
12.1
8%
12.0
3%
12.4
5%
12.6
0%
13.5
1%
18.8
7%
Pro
po
rtio
n o
f
fem
ale
no
n-
exe
cu
tive
dir
ecto
rs t
o
tota
l n
um
ber
of n
on-
execu
tive d
ire
cto
rs
(4) 8
.79%
8.2
2%
8.1
9%
8.6
1%
8.6
1%
9.4
7%
12
.88
%
sa
mp
le y
ea
rs
Pro
po
rtio
n
of
fem
ale
dire
cto
rs
to t
ota
l n
um
be
r
dire
cto
rs
(3) 5
.88%
5.8
0%
5.9
5%
6.3
3%
6.2
6%
6.9
4%
9.5
1%
in e
ach
of
the
Pro
po
rtio
n
of
fem
ale
to
ma
le
dir
ect
ors
(2) 7
.31%
7.2
0%
7.3
8%
7.8
2%
7.8
5%
9.0
8%
12.2
6%
Bo
ard
div
ers
ity
Num
be
r o
f
com
pa
nie
s
(1) 1
99
218
241
266
275
289
299
Ta
ble
2
Ye
ar
2005
2006
2007
2008
2009
2010
2011
Australian Accounting Review 417
Board Diversity and Financial Performance
Pro
po
rtio
n o
f fe
ma
le
non-e
xe
cu
tive
dire
cto
rs to
to
tal
nu
mb
er
of
fem
ale
dir
ecto
rs
(3/1
)
88.3
3%
90.6
4%
79.5
6%
75.3
8%
89.5
0%
86.8
4%
78.1
2%
85.5
2%
80%
52.3
8%
Pro
po
rtio
n o
f fe
ma
le
non-e
xe
cu
tive
dire
cto
rs to
to
tal
nu
mb
er
of
no
n-e
xe
cu
tive
dir
ecto
rs
(3/4
)
6.2
2%
17.1
2%
7.9
5%
6.3
3%
13.8
0%
8.8
9%
13.7
3%
14.0
9%
8.1
6%
6.7
0%
Pro
po
rtio
n o
f
fem
ale
dire
cto
rs to
tota
l n
um
be
r o
f d
ire
cto
rs
(1/2
)
4.0
5%
11.5
5%
5.9
1%
4.8
6%
9.3
4%
6%
10.3
2%
10.6
2%
6.6
%
7.5
8%
2005–2011
To
tal n
um
be
r
of n
on
-exe
cu
tive
dir
ect
ors
(4)
17
03
19
80
13
70
774
10
50
371
182
461
392
164
by in
du
str
y s
ec
tor,
To
tal n
um
be
r
of
fem
ale
no
n-
exe
cutiv
e d
ire
cto
rs
(3)
106
339
109
49
145
33
25
65
32
11
Ta
ble
3 N
um
ber
an
d p
erc
en
tag
e o
f fe
ma
le d
ire
cto
rs
To
tal
Tota
l
num
ber
of n
um
ber
of
Industr
y s
ecto
r
fe
ma
le d
irecto
rs d
irecto
rs
(1)
(2
)
Ma
teria
ls
120 2
956
Fin
ancia
ls
374
3
236
Industr
ials
137 2
318
Energ
y 6
5
1335
Consum
er
dis
cre
tio
nary
162 1
734
Health c
are
3
8 633
Info
rma
tio
n t
echnolo
gy 3
2
310
Consum
er
sta
ple
s
76
715
Utilit
ies
40
606
T
ele
com
mu
nic
atio
n s
erv
ices 21
277
A. Vafaei, K. Ahmed & P. Mather
ranges from one to 140 years, with an average of over
17 years. The proportion of non-executive directors on
the board ranges from 10% to 90.90%, with an average
of 58.67%. Table 5 presents t-tests of the differences in means for
firms with and without women on their boards. On
examination of the table it is apparent that there are some
significant differences. Firms with female directors are larger
($3 billion in total assets versus $992 million), have larger
boards (an average of nine directors versus almost seven
directors), are more asset-intensive (an average of 0.36
versus 0.33 assets-in-place), and therefore have lower
Tobin’s Q. Firms with female directors have an average age
of over 22 years versus 17 years for firms without women on
their boards. Firms with women on their boards also perform
better, as measured by ROA (0.0666 versus 0.0245) or ROE
(0.136 versus 0.063), and have a higher ratio of CFO/TA
(0.0782 versus 0.0508). Overall, the results indicate that
firms with women on the board are older, larger and perform
better.
Results
Board diversity and firm performance
Table 6 reports the regression estimates on the associ-
ation between board diversity dummy (Div) and firm
performance measures based on the sample consisting of
an unbalanced panel of 1101 firm-year observations for
the period 2005–2011. Consistent with our expectations,
panel OLS regression analyses indicate a positive and
significant association between board diversity and firm
performance. The coefficient (p-value) estimates on Div
for ROA, ROE, TOBINQ and CFO/TA are 0.039 (p <
0.01), 0.0798 (p < 0.01), 0.119 (p < 0.05) and 0.0355 (p <
0.01) respectively. However, endogeneity issues prevent
us from concluding that board diversity causes firms to
perform better. One form of endogeneity problem would
arise if the direction of causality between the dependent
and explanatory variables runs in both directions, the
problem of simultaneity or reverse causality (Brown et al.
2011; Jurkus et al. 2011). The Durbin-Wu Hausman test
is used to investigate the existence of endogeneity. To
perform the test, at the first stage, Div – potential
endogenous variable – is regressed against the control
variables. From this, the residuals are extracted. In the
second stage, the firm performance measures (i.e.,
dependent variables) are regressed against the residuals
obtained in the first stage along with the control
variables. The coefficient (p-value) estimates on Div
residuals for ROA, ROE, TOBINQ and CFO/TA are 0.040 (p < 0.01), 0.08 (p < 0.01), 0.120 (p <
0.05) and 0.036 (p < 0.01) respectively. Significant p-
value estimates on Div residuals across all models
indicate that board diversity variables are endogenous
across all models and therefore OLS regressions are not
418 Australian Accounting Review C 2015 CPA Australia
A. Vafaei, K. Ahmed & P. Mather Board Diversity and Financial Performance
Table 4 Description of firm characteristics
Variable Number of observations Minimum Maximum Mean Median Std. Deviation
ROA 2915 −0.489 0.292 0.0376 0.0552 0.1306
ROE 2884 −0.693 0.7008 0.0832 0.0895 0.226 TOBINQ 2914 0.829 3.865 1.793 1.404 0.984
CFO/TA 2914 −0.317 0.424 0.0581 0.0519 0.125 Divprop 1787 0.000 0.60 0.0678 0.000 0.0928
BHO 2078 0.0500 1.00 0.3928 0.3559 0.223
MSO 2770 0.000 0.9940 0.1125 0.0263 0.174
BSize 1787 3 20 7.90 8 2.751
FAge 3500 1 140 17.024 12 15.871
Lev 2648 0.000 3.909 0.372 0.133 0.719
FSize (Dollar, millions) 2915 72 132 582 8 470 000 000 2 120 000 000 783 000 000 2 740 000 000
ln (FSize) 2915 4.284 9.044 6.679 6.662 1.523
NonExec 1779 0.100 0.9090 0.5867 0.600 0.1413
Asstplc 2364 0.00067 0.877 0.355 0.331 0.271
Table 5 Comparison of the means for firms with and without females on their boards
Variable Average Average t-statistic
(Diversity = 1) (Diversity = 0)
ROA 0.066 0.0245 7.118∗∗∗
ROE 0.136 0.0630 7.241∗∗∗
TOBINQ 1.617 1.952 −7.166∗∗∗
CFO/TA 0.0782 0.0508 4.687∗∗∗
BHO
0.35
0.41 −
5.171∗∗∗
MSO 0.0699 0.155 −10.374∗∗∗
BSize 9.168 6.982 18.017∗∗∗
FAge 22.113 17.064 6.424∗∗∗
Lev 0.388 0.297 2.746∗∗∗
FSize (Dollar, millions) 3 814 685 835 992 037 558 23.967∗∗∗
ln (FSize) 7.575 6.028 24.081∗∗∗
NonExec 0.6317 0.5538 11.919∗∗∗
Asstplc 0.36 0.33 1.781∗ ∗ , ∗∗ and ∗∗∗ are significant at the 0.1, 0.05 and 0.01 levels, respectively.
efficient.5 Gujarati and Porter (2009) recommend that ‘if
the hypothesized equation is determined to actually be
simultaneous, then two-stage least squares (2SLS) or
instrumental variables methods should be used instead of
ordinary least squares’ (Carter et al. 2010: 409). The IV
method requires an instrument that is correlated with
gender diversity but uncorrelated with firm performance
measures, except through the control variables (Adams
and Ferriera 2009; Jurkus et al. 2011). In the corporate
governance context it is usually difficult to find a valid
instrument (Adams and Ferriera 2009; Brown et al. 2011;
Jurkus et al. 2011) because firm characteristics that are
correlated with board diversity are other governance
variables that are already (or should be) included in
performance regressions, such as board size, percentage
of non-executive directors, firm size, etc. (Adams and
Ferriera 2009: 305; Jurkus et al. 2011: 183). Following
Adams and Ferriera (2009: 306) we define our instrument
as ‘the fraction of total board seats in other firms with
female directors’. According to them ‘one reason for
absence of women on boards is their lack of connections’.
As a result, arguably, the more connected
directors are to women, the more female directors should
be observed. Similar to Adams and Ferriera (2009: 306)
we also use variations of this instrument, such as ‘the
fraction of male directors on the board who sit on other
boards on which there are female directors’. Our results are similar using either of the instruments;
however, the correlation of our chosen instrument with
the board diversity variables is higher. Results of the
2SLS tests between board diversity dummy (Div) and
firm performance measures are reported in Table 6. In the
first stage we regress Div against all control variables and
the Instrumental variable (‘Fraction’ from now on). First
stage results indicate a positive and significant
association between Div (dependent variable) and the
Fraction (p < 0.01).6 The Fraction is also uncorrelated
with performance measures except through control
variables included in the regression analysis. This sat-
isfies the second condition for a valid instrument.7 The
results from the 2SLS regression analyses are consistent
with those of OLS regressions; the coefficient on board
diversity is positive and statistically significant across all
models at the 0.01 level. The estimated coefficient
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Table 6 Relation between board diversity (presence of a woman on the board) and firm financial performance
Dep. Var. = ROA Dep. Var. = ROE Dep. Var. = TOBINQ Dep. Var. = CFO/TA
Panel Panel 2SLS Panel Panel 2SLS Panel Panel 2SLS Panel Panel 2SLS
Variable OLS (Second stage) OLS (Second stage) OLS (Second stage) OLS (Second stage)
Intercept 0.0345 0.203 0.136 0.412 3.762 4.494 0.104 0.245
(1.975) (4.20)∗∗∗ (2.634)∗∗∗ (4.52)∗∗∗ (18.118)∗∗∗ (13.58)∗∗∗ (3.329)∗∗∗ (4.75)∗∗∗
Div 0.0396 0.231 0.0798 0.392 0.119 0.950 0.0355 0.195 (4.742)∗∗∗ (6.45)∗∗∗ (5.314)∗∗∗ (5.96)∗∗∗ (1.986)∗∗ (4.02)∗∗∗ (3.911)∗∗∗ (5.10)∗∗∗
BHO 0.0190 0.0620 0.0227 0.0929 −0.309 −0.122 −0.0064 0.0295
(1.0305) (2.70)∗∗∗ (0.684) (2.26)∗∗ (−2.318)∗∗ (−0.83) (−0.3209) (1.20)
MSO 0.0214 0.0359 0.0337 0.0574 0.343 0.406 −0.0217 −0.0095
(0.931) (1.12) (0.815) (1.06) (2.073)∗∗ (2.10)∗∗ (−0.8707) (−0.31)
BSize −0.0451 −0.0844 −0.0501 −0.114 0.0683 −0.102 −0.0079 −0.408
(−3.537)∗∗∗ (−4.31)∗∗∗ (−2.188)∗∗ (−3.46)∗∗∗ (0.744) (−0.88) (−0.5707) (−2.26)∗∗
FAge −0.002 0.00242 −0.0111 −0.00373 −0.0057 0.0138 −0.00438 −0.0006
(−0.408) (0.39) (−1.205) (−0.35) (−0.155) (0.37) (−0.786) (−0.10)
Lev −0.0157 −0.00674 −0.0207 −0.00603 −0.440 −0.401 −0.0229 −0.0153
(−2.394)∗∗ (−0.75) (−1.755)∗ (−0.46) (−9.291)∗∗∗ (−7.31)∗∗∗ (−3.201)∗∗∗ (−1.64)
FSize 0.0179 −0.0019 0.0188 −0.0137 −0.253 −0.339 0.00324 −0.134
(5.347)∗∗∗ (−0.37) (3.117)∗∗∗ (−1.40) (−10.460)∗∗∗ (−9.90)∗∗∗ (0.889) (−2.38)∗∗
NonExec −0.0449 −0.171 −0.0930 −0.3005 −0.103 −0.653 −0.0623 −0.168
(−1.592) (−3.86)∗∗∗ (−1.835)∗ (−3.88)∗∗∗ (−0.508) (−2.32)∗∗ (−2.033)∗∗ (−3.54)∗∗∗
Asstplc 0.0185 0.0482 0.0106 0.0591 −0.296 −0.168 0.0518 0.0766
(1.369) (2.91)∗∗∗ (0.437) (2.04)∗∗ (−3.039)∗∗∗ (−1.59) (3.519)∗∗∗ (4.84)∗∗∗
Number of 224 224 224 224 224 224 224 224
cross-sections
Number of 1101 1101 1101 1101 1101 1101 1101 1101
observations
(unbalanced
panel)
R2
0.06435 0.0793 0.04511 0.0554 0.2626 0.1340 0.0394 0.0542 Adjusted R
2 0.0566 0.0658 0.0372 0.0483 0.2565 0.1268 0.0315 0.0513
F-statistic 8.33∗∗∗ 12.913∗∗∗ 5.727∗∗∗ 8.723∗∗∗ 43.181∗∗∗ 45.550∗∗∗ 4.976∗∗∗ 7.455∗∗∗
∗ , ∗∗ and ∗∗∗ are significant at the 0.1, 0.05 and 0.01 levels, respectively with one-tailed significance applied where the directionality of the sign of the coefficient was predicted and two-
tailed where directionality was not specified. Coefficient values are shown outside the parentheses, with t-stat values shown inside the parentheses. The different variables used in the table are defined as follows: Div = Dummy variable equal to 1 in case of the presence of a woman on the board, 0 otherwise. BHO = Sum of shares owned by
shareholders who hold more than 5% of a company’s total shares at the reporting date. MSO = Percentage of ordinary shares owned by directors at the reporting date. BSize = Natural logarithm of the
number of directors at the reporting date. FAge = Natural logarithm of firm age. Lev = Ratio of book value of long-term debt by market value of equity. FSize = Natural logarithm of total assets. NonExec
= proportion of non-executive directors on board compared to total number of directors. Asstplc = Ratio of the sum of inventory, property, plant and equipment to total assets.
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of board diversity suggests that a 1% increase in
female directors is associated with a 0.231% increase
in ROA, 0.392% increase in ROE, 0.950% increase in
TOBINQ and 0.195% increase in CFO/TA. With respect to control variables, BSize indicates a sig-
nificant and negative association with all performance
measures – except for TOBINQ. This is consistent with
the argument that larger boards are less likely to function
effectively due to coordination and communication
problems, which would negatively affect board effective-
ness and also firm performance (Kameda et al. 1992;
Lipton and Lorsch 1992; Jensen 1993). The direction of
association between leverage and all firm performance
measures is negative but leverage has only a significant
and negative association with TOBINQ. This is consis-
tent with the results of Opler and Titman (1994) and
Gonzalez´ (2013) and indicates that market performance
of firms with higher leverage is significantly reduced.
Asset intensity has a positive and significant association
with accounting and economic-based measures of firm
performance. This indicates that higher asset intensity is
associated with improved accounting and economic per-
formance. FSize has a negative and significant association
with TOBINQ and CFO/TA. The direction of association
between FSize and other firm performance measures is
negative but insignificant. This suggests that not nec-
essarily larger firms perform better (Hart and Oulton
1996), and in fact smaller firms may have an incentive to
grow with the prospect of exploiting various bene-fits
attributed to larger firms (Symeou 2010: 3). Other results
reported in Table 6 indicate that MSO is only positively
and significantly associated with TOBINQ and it does not
have a significant association with other firm performance
measures. This is consistent with the findings of Craswell
et al. (1997) who indicate that MSO is not an important
determinant of Australian corporate performance.8 BHO
indicates a positive association with ROA and ROE and a
negative and significant association with TOBINQ. Such
inconsistent results could be due to nonlinear association
of BHO with firm performance (Thomsen et al. 2006).
Finally NonExec indicates a negative and significant
association with all performance measures.9 All models
are highly significant, with F-statistic ranging between
7.45 and 45.55, although adjusted R2 ranges between
4.83% and 12.68%. Table 7 reports the regression estimates on the asso-
ciation between proportion of female board members
(Divprop) and firm performance measures. OLS regres-
sion results indicate a positive and significant association
between Divprop and all firm performance measures.
However, due to the existence of endogeneity10
2SLS re-
gressions are conducted. The first stage of the regression
analysis indicates that the Fraction is significantly and
positively associated with Divprop (p < 0.01).11
The sec-
ond stage regression coefficient estimates on Divprop are
positive and significant across all four models (p < 0.01).
Board Diversity and Financial Performance
These are consistent with the results reported in Table 6
and once again support our hypothesis. The control vari-
ables in Table 7 indicate a relatively similar pattern with
Table 6 variables. The models are significant with com-
parable adjusted R2 as reported in Table 6.
Overall, the positive association between firm perfor-
mance and board diversity is consistent with theoretical
predictions underpinning resource dependence and
agency perspectives. The results suggest that bringing to-
gether a diverse range of skills and experience on boards
improves business performance and could improve deci-
sion effectiveness (Australian Institute of Company Di-
rectors 2013). In fact, as stated by John Colvin, Chief
Executive Officer and Managing Director of the Aus-
tralian Institute of Company Directors, ‘It is not only
good social policy but it makes good business sense that
our boards and companies benefit from all the talents that
is available to them’ (Australian Institute of Company
Directors 2013).
Further analysis
Owing to the negative association between the percent-
age of non-executive directors and firm performance
measures, we investigate the association between the
percentage of female non-executive directors (FEM-
NONEXEC) and firm performance. Table 8 reports the
regression estimates on the association between
percentage of female non-executive directors and firm
performance measures. The correlation coefficient
between FEMNONEXEC and Div (Divprop) is 0.811
(0.917) at p < 0.01. As a result Div (Divprop) is excluded
from the regression analysis. Due to the existence of
endogeneity 2SLS tests are conducted. The first-stage
results indicate a positive and significant association
between FEMNONEXEC and the Fraction (p < 0.01).12
The second-stage results indicate a significant and
positive association between FEMNONEXEC and all firm
performance measures. The association between NonExec
and all firm performance measures remains negative and
significant. Results remain the same by using variations
of the instrument. We also examine the effect of year and industry
dummies and the interaction of industry dummy and
board diversity on firm performance measures. Untab-
ulated results show that the coefficient on Div (Divprop)
remains significant across all models; however, neither
the year dummy or industry sector dummy variables, nor
the interaction of industry sector and board diversity
indicators (including the dummy variable and proportion
of female directors) are found to have a significant
relationship with firm performance. We also investigate
the association between squared Divprop and firm
performance measures to test the proposition that a
critical mass of women is required for board
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Table 7 Relation between board diversity (proportion of women on the board) and firm financial performance
Dep. Var. = ROA Dep. Var. = ROE Dep. Var. = TOBINQ Dep. Var. = CFO/TA
Panel Panel 2SLS Panel Panel 2SLS Panel Panel 2SLS Panel Panel 2SLS
Variable OLS (Second stage) OLS (Second stage) OLS (Second stage) OLS (Second stage)
Intercept 0.0149 0.0828 0.0981 0.207 3.687 3.999 0.0848 0.143
(0.531) (2.18)∗∗ (1.945)∗ (2.95)∗∗∗ (18.215)∗∗∗ (15.28)∗∗∗ (2.774)∗∗∗ (3.52)∗∗∗
Divprop 0.195 1.0609 0.407 1.802 0.386 4.358 0.1502 0.898
(4.575)∗∗∗ (6.30)∗∗∗ (5.317)∗∗∗ (5.89)∗∗∗ (1.924)∗ (3.98)∗∗∗ (3.237)∗∗∗ (4.92)∗∗∗
BHO 0.0195 0.0609 0.0243 0.0911 −0.317 −0.127 −0.00723 0.0285
(1.052) (2.86)∗∗∗ (0.731) (2.39)∗∗ (−2.376)∗∗ (−0.88) (−0.358) (1.20)
MSO 0.0205 0.0303 0.0322 0.0479 0.338 0.383 −0.0227 −0.0143
(0.895) (0.99) (0.7803) (0.94) (2.042)∗∗ (2.06)∗∗ (−0.909) (−0.48)
BSize −0.0392 −0.0494 −0.0385 −0.0549 0.0883 0.0417 −0.00238 −0.0111
(−3.103)∗∗∗ (−2.90)∗∗∗ (−1.696)∗ (−1.90)∗∗ (0.969) (0.40) (−0.173) (−0.70)
FAge −0.0018 0.00365 −0.0104 −0.00163 −0.0061 0.0189 −0.00427 0.000445
(−0.3507) (0.60) (−1.130) (−0.16) (−0.165) (0.51) (−0.764) (0.08)
Lev −0.0164 −0.0108 −0.0219 −0.01309 −0.444 −0.418 −0.0236 −0.0188
(−2.489)∗∗ (−1.56) (−1.856)∗ (−1.23) (−9.357)∗∗∗ (−7.90)∗∗∗ (−3.298)∗∗∗ (−2.32)∗∗
FSize 0.0191 0.00607 0.0209 −0.00007 −0.246 −0.306 0.00486 −0.00662
(5.784)∗∗∗ (1.25) (3.530)∗∗∗ (−0.01) (−10.334)∗∗∗ (−10.65)∗∗∗ (1.298) (−1.33)
NonExec −0.0394 −0.131 −0.0834 −0.231 −0.0652 −0.487 −0.0547 −0.134
(−1.405) (−3.19)∗∗∗ (−1.657)∗ (−3.27)∗∗∗ (−0.322) (−1.84)∗ (−1.794)∗∗ (−3.00)∗∗∗
Asstplc 0.01709 0.0378 0.0080 0.0414 −0.305 −0.2109 0.0499 0.0678
(1.262) (2.44)∗∗ (0.330) (1.52) (−3.136)∗∗∗ (−2.06)∗∗ (3.388)∗∗∗ (4.56)∗∗∗
Number of 224 224 224 224 224 224 224 224
cross-sections
Number of 1101 1101 1101 1101 1101 1101 1101 1101
observations
(unbalanced panel)
R2
0.06305 0.0781 0.0451 0.0545 0.261 0.1477 0.0352 0.0513 Adjusted R
2 0.0553 0.0674 0.0372 0.0474 0.254 0.1407 0.0272 0.0504
F-statistic 8.158∗∗∗ 12.918∗∗∗ 5.731∗∗∗ 8.723∗∗∗ 42.826∗∗∗ 45.550∗∗∗ 4.426∗∗∗ 7.455∗∗∗
∗ ,∗∗ and ∗∗∗ represent significance at the 0.1, 0.05 and 0.01 levels, respectively with one-tailed significance applied where the directionality of the sign of the coefficient was predicted, and
two-tailed where directionality was not specified. Coefficient values are shown outside the parentheses, with t-stat values shown inside the parentheses. The different variables used in the table are defined as follows: Divprop = Proportion of female directors on the board compared to the total number of directors. BHO = Sum of shares owned by
shareholders who hold more than 5% of a company’s total shares at the reporting date. MSO = Percentage of ordinary shares owned by directors at the reporting date. BSize = Natural logarithm of the
number of directors at the reporting date. FAge = Natural logarithm of firm age. Lev = Ratio of book value of long-term debt by market value of equity. FSize = Natural logarithm of total assets. NonExec
= proportion of non-executive directors on board compared to total number of directors. Asstplc = Ratio of the sum of inventory, and property, plant and equipment to total assets.
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Table 8 Relation between female non-executive directors and firm financial performance
Dep. Var. = ROA Dep. Var. = ROE Dep. Var. = TOBINQ Dep. Var. = CFO/TA
Variable Panel 2SLS Panel 2SLS Panel 2SLS Panel 2SLS
(Second stage) (Second stage) (Second stage) (Second stage)
Intercept 0.0964 0.230 4.055 0.155
BHO
(2.7.02)∗∗∗ (3.682)∗∗∗ (17.172)∗∗∗ (4.211)∗∗∗
0.0509 0.0740 −0.168 0.0200
(2.275)∗∗
(1.886)∗ ( −
(0.869)
MSO
1.139)
0.0393 0.0632 0.420 −0.006
(1.455)
(1.332)
(2.350)∗∗ ( −
BSize
0.240)
−0.0517 −0.0588 0.0322 −0.0131
(
−
3.466)∗∗∗ ( −
(0.326)
( −
2.246)∗∗ 0.852)
FAge 0.0036 −0.00163 0.0189 0.0004
Lev
(0.602) (−0.152) (0.471) (0.0711)
−0.0046 −0.00247 −0.393 −0.0135
(
−
0.587) ( −
( −
( −
0.177) 7.495)∗∗∗ 1.661)∗
FSize 0.00803 0.00324 −0.298 −0.0049
(1.848)∗
(0.425) −
( −
NonExec
( 10.383)∗∗∗ 1.108)
−0.160 ( −0.281 ( −0.607 ( −0.159 (
− 4.142 )
∗∗∗ 4.133 )
∗∗∗ 2.368 )
∗∗ 3.975 )
∗∗∗
FEMNONEXEC − − −
1.179 2.003 4.845 0.999
Asstplc
(6.617)∗∗∗ (6.405)∗∗∗ (4.110)∗∗∗ (5.434)∗∗∗
0.0369 0.0400 −0.214 0.0671
(2.283)∗∗
(1.407) (
−
(4.019)∗∗∗
Number of cross-sections 2.001)∗∗
224 224 224 224
Number of observations (unbalanced panel) 1101 1101 1101 1101
R2 0.0487 0.0452 0.1514 0.0291
Adjusted R2
0.0476 0.0424 0.1444 0.0283
F-statistic 12.918∗∗∗ 8.723∗∗∗ 45.550∗∗∗ 7.455∗∗∗ ∗ , ∗∗ and ∗∗∗ represent significance at the 0.1, 0.05 and 0.01 levels, respectively with one-tailed significance applied where the
directionality of the sign of the coefficient was predicted and two-tailed where directionality was not specified. Coefficient values are
shown outside the parentheses, with t-stat values shown inside the parentheses. The different variables used in the table are defined as follows: Div = Dummy variable equal to 1 in case of the presence of women
on the board, 0 otherwise. BHO = Sum of shares owned by shareholders who hold more than 5% of a company’s total shares at
the reporting date. MSO = Percentage of ordinary shares owned by directors at the reporting date. BSize = Natural logarithm of the
number of directors at the reporting date. FAge = Natural logarithm of firm age. Lev = Ratio of book value of long-term debt by
market value of equity. FSize = Natural logarithm of total assets. NonExec = proportion of non-executive directors on board
compared to total number of directors. FEMNONEXEC = proportion of female non-executives on board compared to total number
of directors. Asstplc = Ratio of the sum of inventory, property, plant and equipment to total assets.
diversity to have a significant influence on firm perfor-
mance (Joecks et al. 2013). The coefficient estimates on
squared Divprop are not significant for either of the firm
performance measures.13
This indicates that the rela-
tionship between Div (Divprop) and firm performance is a
linear one. This is in contrast to the finding of Joecks et
al. (2013) who find a non-linear association between
board diversity and firm performance measures. We also
control for the effect of other corporate governance
variables such as CEO duality. However, we did not
include this variable in the main analysis because the
number of firms in our sample with CEO duality is quite
low, which would have generated a less reliable
coefficient. The further analysis that controls for this
variable gives results that are qualitatively similar.
Conclusion
This paper examines the association between board diversity and firm performance. Gender diversity (as C 2015 CPA Australia
part of board diversity) is a topical research issue to
assess whether gender balance adds value to corporate
boards. It is argued that this added value is in
maximising shareholders’ wealth and bringing more
‘equity and justice’ into boards and corporations. Two
theoretical perspectives, agency and resource
dependence theory, that underpin this research suggest
that there should be a positive association between
board diversity and firm performance.
The policy motivation for this study arises from the
amendments made to the ASX Corporate Governance
Council principles and recommendations implicitly re-
quiring companies to establish policies to increase board
diversity. The proportion of women who reach senior
positions in the business sector remains very low in
Australia. If it could be demonstrated that on aver-age,
women on boards of directors enhance firm per-
formance, then there is a business case to support the
regulatory pressure to appoint more women on boards.
Using a sample of the top 500 ASX listed firms over
the period between 2005 and 2011, this study empirically
423 Australian Accounting Review
Board Diversity and Financial Performance
analysed whether the proportion of women on boards of
directors affects firm performance. The results indicate
that there is a trend toward the appointment of women on
corporate boards in Australia since 2010, and that it is
mainly the older, larger and better performing firms that
have female representatives on their boards. Also, despite
the typically low percentage of female directors, this
study finds a positive association between board diversity
and firm financial performance after control-ling for
several firm-specific and governance variables. Further
tests for the causality between the proportion of women
on boards of directors and financial performance suggest
that it is board diversity that affects performance, not the
opposite. A potential limitation is that a sample of the top
500 ASX listed firms means that the findings of this study
may not be generalisable to smaller ASX listed firms.
This study has implications for practice and regu-
lation. Showing that women on boards is associated with
enhanced firm performance supports the business case for
the recent Australian regulatory change, informs board
nomination committees and complements social justice
arguments for increasing the number of women on
boards. This study also highlights possibilities for future
research. Future work could investigate the effect of
board diversity and its interaction with various factors
such as tenure and expertise on firm performance. There
is also scope for qualitative research, such as interviews
with board members and corporate directors, on per-
ceptions of female directors’ impact on monitoring and
strategic decisions.
Acknowledgements
Earlier versions of this paper were presented at the 2013
Accounting and Finance Association of Australia and
New Zealand (AFAANZ) Conference, the 3rd
Financial
Markets and Corporate Governance Conference held in
Melbourne in April 2012, as well as La Trobe University,
Department of Accounting Seminar Series (semester 1,
2012). The authors would like to gratefully acknowledge
helpful comments and suggestions from Darren Henry,
John Hillier, Donald Stokes, Robert Faff, Zahirul Hoque,
Xu Dong Ji, Jahangir Ali, Judy Louie and Biserka Siladi.
In addition, financial assistance received via a research
grant from AFAANZ, as well as an internal research grant
received from the Faculty of Business, Economics and
Law, La Trobe University, is gratefully acknowledged.
Notes
1 Board diversity relates to the degree of similarity and difference
between the directors on a board. There are a number of ways to
describe differences between individuals, which may include
A. Vafaei, K. Ahmed & P. Mather
‘measurable factors such as age, gender, and socio-economic or
cultural background’ (Corporations and Markets Advisory
Committee (CAMAC) 2009: 23). 2 As indicated by Givoly and Hayn (2000: 300), ‘a measure of
individual company performance which is unaffected by
accrual accounting is the cash flow from operations’.
Following them, this study uses the ratio of CFO-to-assets to
assess firms’ economic performance. 3 Estimates of the replacement costs of assets are not reported in
Australia. 4 In the models, we also control for the effect of year and
industry dummies and the interaction of industry dummies and
board diversity. 5 The full results of these tests include the regression results for
two regression equations for each model and a total of eight
regression equations across all models. Therefore, we do not
report all the results to save space. Full results are available
upon request from the authors. 6 The first-stage model between Div and the Fraction is highly
significant with F-statistic at 81.12 and adjusted R2 at 29.62%.
7 Full results of the first-stage regression analyses are available upon request.
8 According to Craswell et al. (1997) and Khan et al. (2014) the
association between MSO and firm performance could be a
non-linear one. 9 Further tests are conducted to investigate the direction of
association between proportion of female non-executive
directors and firm performance measures. 10 The coefficient (p-value) estimates on Divprop residuals for
ROA, ROE, TOBINQ and CFO/TA are 0.195 (p < 0.01), 0.407
(p < 0.01), 0.386 (p < 0.1) and 0.150 (p < 0.01) respectively.
The full set of results is available upon request. 11 The first-stage model between Divprop and the Fraction is highly
significant with F-statistic at 39.17 and adjusted R2 at 21.08%.
12 The first-stage model between FEMNONEXEC and the Fraction is
highly significant with F-statistic at 36.762 and adjusted R2 at
22.63%. First-stage results are available upon request. 13 We test the association between squared Divprop and firm per-
formance measures by using 2SLS tests. To do this, in the
second stage, squared Divprop along with Divprop and other
control variables are regressed against all firm performance
measures. To run this set of 2SLS tests, we use two different
instrumental variables including ‘the fraction of total board
seats in other firms with female directors’ and ‘the fraction of
male directors on the board who sit on other boards on which
there are female directors’.
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