Board gender diversity and acquisition choices

• Published date: 01 December 2023
• Author: Abeyratna Gunasekarage,Mehdi Khedmati,Kristina Minnick,Syed Shams
• Date: 01 December 2023
• DOI: http://doi.org/10.1111/jfir.12345

Received: 9 July 2021

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Accepted: 11 July 2023

DOI: 10.1111/jfir.12345

ORIGINAL ARTICLE

Board gender diversity and acquisition choices

Abeyratna Gunasekarage

1

|Mehdi Khedmati

2

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Kristina Minnick

3

|Syed Shams

4

1

Department of Banking and Finance,

Monash University, Melbourne, Australia

2

Department of Accounting, Monash

University, Melbourne, Australia

3

Department of Finance, Bentley University,

Waltham, Massachusetts

4

Department of Accounting and Finance,

University of Southern Queensland,

Queensland, Australia

Correspondence

Kristina Minnick, Department of Finance,

Bentley University, Waltham, MA 02452,

USA.

Email: kminnick@bentley.edu

Abstract

We investigate the influence of gender diversity on the

acquisition choices of bidding firms and find that firms with

greater gender diversity are more likely to acquire nonlisted

targets, use cash as the method of payment, and purchase

firms in similar industries. Results show that these prefer-

ences are significantly influenced by female directors'

financial expertise, target industry experience, mergers

and acquisitions (M&A) experience, academic and profes-

sional qualifications, and networks. The percentage of

female directors on boards is positively correlated with the

market response to the announcement of acquisition

choices preferred by female directors. Furthermore,

bidders improve efficiency and accumulate long‐term value

gains through the contributions made by their female

directors to these acquisition choices.

JEL CLASSIFICATION

G14, G30, G34, J24

1|INTRODUCTION

Practitioners and researchers alike have tried to determine why certain acquisitions succeed while many others fail.

According to a 2018 Deloitte report focusing on acquisition outcomes, “more than half of all respondents say that up

to a quarter of all deals fall short of meeting or exceeding expectations”.

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Acquisitions are a significant driver of firm

value, and the board of directors plays an integral role in acquisition decisions. Recent investigations on the

J Financ Res. 2023;46:949–991. wileyonlinelibrary.com/journal/JFIR

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© 2023 The Southern Finance Association and the Southwestern Finance Association.

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https://www2.deloitte.com/content/dam/Deloitte/us/Documents/mergers-acqisitions/us-mergers-acquisitions-2018-trends-report.pdf.

influence of gender diversity on acquisition decisions reveal that acquirers with female directors on their boards and

C‐suites achieve better acquisition outcomes (Dowling & Aribi, 2013; Huang & Kisgen, 2013; Levi et al., 2010,2014),

primarily because female directors are more effective in monitoring firms and they apply a broader perspective in

strategic decision making (Adams & Ferreira, 2009; Coffey & Wang, 1998; Huse & Solberg, 2006; Nielsen &

Huse, 2010). We extend the debate on female directors' influence on acquisition decisions by examining whether

board gender diversity plays a role in why some acquisition choices create value for shareholders. Acquirers

encounter acquisition decisions related to the organizational form of the target, method of payment, and business

diversification, all of which have implications for shareholder wealth. Therefore, we investigate the role that greater

gender diversity on corporate boards plays in these strategically important acquisition choices.

The literature empirically demonstrates that a gender‐diverse board has a positive effect on firm output. For

instance, Gul et al. (2011) show that gender‐diverse boards improve the quality of firms' financial disclosures and

reports. Millerand delCarmen Triana (2009) and Carter et al. (2003) show that firms with a higher percentage of

female directors on their boards increase innovation and have positive stock market return and firm value. The

literature shows that female directors diligently monitor firms, resulting in better outcomes. This is driven in part by

their relational abilities (Galbreath, 2011), diligence and attendance in meetings (Adams & Ferreira, 2009),

willingness to make alliances (Huse & Solberg, 2006), and managerial styles related to risk aversion (Bertrand, 2011).

If gender diversity improves monitoring and quality of strategic decisions, having more female directors on boards

should motivate companies to pursue acquisition choices that create value for their shareholders and discourage

choices that benefit managers at the expense of shareholder wealth.

A stream of literature argues that female directors possess diverse attributes (qualifications and experience)

and are effective and diligent monitors. Female directors actively participate in corporate governance and therefore

adopt a strategic perspective in decision making compared with their male counterparts (Adams & Ferreira, 2009;

Adams & Funk, 2012; Boulouta, 2013). Acquisition decisions involve strategically important choices, such as

acquiring listed versus nonlisted firms; using internal cash, new debt, or a stock swap to finance acquisitions; and

diversifying through acquisitions as opposed to purchasing a related firm. The empirical evidence suggests that

these choices have different value consequences for bidding firms. In this context, when confronted with

acquisition decisions, female directors can be expected to use their distinct skills and conduct due diligence to make

decisions aligned with the bidder's corporate strategy and accumulate long‐term benefits for the firm.

Consequently, we analyze whether the percentage of female directors on a board influences three main choices

in an acquisition: (1) acquisition of a listed versus nonlisted target (i.e., organizational form choice), (2) cash‐financed

versus noncash acquisitions (i.e., payment method choice), and (3) related versus unrelated acquisitions (i.e.,

diversification choice). We focus on these choices because the literature shows that acquisitions of private targets

and cash‐financed deals tend to be accretive, whereas acquisitions of public targets and stock‐financed acquisitions

are viewed as dilutive (e.g., Ang & Kohers, 2001; Chang, 1998; Fuller et al., 2002; Officer, 2007). Furthermore,

market participants penalize acquirers when they make diversifying acquisitions (Morck et al., 1990). Accordingly,

we first analyze whether the percentage of female directors on corporate boards influences these acquisition

choice decisions. Next, we investigate whether female directors' experience or attributes influence acquisition

choices. Finally, we explore whether female directors' contributions are associated with efficiency gains as reflected

by the time taken to complete a deal and long‐run performance improvements for their firms.

Using 10,642 acquisition announcements made by US firms between 1999 and 2016, we show that boards

with a greater fraction of female directors tend to prefer (1) acquiring nonlisted versus listed targets, (2) using cash

as the method of payment rather than making noncash acquisitions, and (3) acquiring related versus unrelated

targets. The marginal effect analysis indicates that a 10% increase in female directors (one additional female

director) results in a 10.79% increase in the probability of acquiring a nonlisted target, 23.20% increase in the

probability of using cash as the method of financing, and 17.62% increase in the probability of making a bid to

acquire a related target. These findings remain robust after controlling for endogeneity. The influence of female

directors on these acquisition choices is significantly pronounced when acquirers have a critical mass of female

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directors (two or more women). An analysis of female directors' attributes shows that female directors with unique

characteristics, such as strong networks, financial expertise, industry experience, mergers and acquisitions (M&A)

experience, an Ivy League education, and chartered financial analyst (CFA) or certified public accountant (CPA)

certification, are more likely to choose nonlisted targets, pay with cash, and acquire related targets.

We also analyze whether the market reacts positively to certain acquisition choices, controlling for the

percentage of female directors on the board. We find that boards with greater gender diversity have better returns

when they acquire private targets or nondiversified targets, or make cash‐financed deals. Acquirers also experience

significant improvements in their long‐term firm value owing to gender diversity's role in acquisition choices. Finally,

more gender‐diverse boards spend more time on due diligence for these acquisitions than firms with non‐gender‐

diverse boards.

Our article makes several contributions. First, considering the growing interest among practitioners and

academics regarding the role played by female directors in corporate strategic decisions, (e.g., Adams &

Ferreira, 2009; Berger et al., 2014; Graham et al., 2013; Huang & Kisgen, 2013; Malmendier et al., 2011), our

research contributes to both the behavioral finance and M&A literatures by extending the debate on the influence

of gender‐diverse boards on acquisition decisions. Second, prior studies have examined the influence of gender‐

diverse boards on acquisitiveness and the premium paid from a holistic perspective without considering female

directors' preferences for acquisition choices (e.g., Levi et al., 2010,2014). Our article offers new perspectives to

this line of investigation by examining specific acquisition choice decisions preferred by female directors and value

consequences associated with those choices. Finally, by analyzing the influence of female directors' skills,

experience, and expertise on acquisition choice decisions of firms, we provide evidence about the channels through

which female directors can shape acquisition choice decisions of their firms.

2|LITERATURE REVIEW AND RESEARCH QUESTIONS

2.1 |Gender‐related traits

The recent literature on gender diversity seeks to explain why it adds value and results in improved decision making

by a board of directors. Certain traits highlighted in the literature may influence the choices of gender‐diverse

boards in the acquisition process, including specific relational abilities based on directors' qualifications and

experiences that enable alliances and conservative decision making, resulting in better diligence. We explore the

literature and discuss how these traits may influence specific decisions during the acquisition process.

Huse and Solberg (2006) show that female directors' relational abilities lead firms with gender‐diverse boards

to have better relationships with stakeholders. One explanation they offer is that women may be more ethical,

which reduces friction and information asymmetry. Johnson et al. (2013) propose female directors' attributes as

mediating variables for information asymmetry and agency issues, arguing that these attributes (e.g., experience,

skills, and demographic characteristics) enhance the effectiveness of the board's monitoring. Hambrick and Mason

(1984) suggest that the importance of director attributes is explained by upper echelon theory: Directors' unique

backgrounds shape how they interpret strategic decisions. Biggins (1999) demonstrates that, compared with men,

women are better at building and maintaining relationships; thus, female directors can rely on their relational

abilities to make strategic decisions, as they understand the needs of all key players. Westphal and Milton (2000)

show that these relational abilities allow female directors to build connections with other directors, enabling them

to influence decision making and minimizing the perception that they are merely symbolic appointments. These

relational abilities may influence the types of targets selected during acquisitions.

In addition to female directors' relational skills, the gender literature suggests that managerial characteristics

related to conservative decision making (i.e., less driven by overconfidence) may explain why gender‐diverse boards

add firm value (e.g., Khan & Vieito, 2013). Gender diversity may curtail empire building by overconfident executives.

BOARD GENDER DIVERSITY

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