Does board gender diversity affect corporate cash holdings?

• Date: 01 July 2019
• Published date: 01 July 2019
• DOI: http://doi.org/10.1111/jbfa.12397
• Author: Benjamin Liu,Allen Huang,Muhammad Atif

DOI: 10.1111/jbfa.12397

Does board gender diversity affect corporate cash

holdings?

Muhammad Atif1Benjamin Liu2Allen Huang2

1EssexBusiness School, University of Essex,

Colchester, UK

2Department of Accounting, Finance and

Economics, Griffith Business School, Griffith

University, Brisbane, Australia

Correspondence

MuhammadAtif, Essex Business School, Univer-

sityof Essex, Wivenhoe Park, Colchester CO4

3SQ,UK.

Email:m.atif@essex.ac.uk

Abstract

This paper examines whether board gender diversity affects cor-

porate cash holdings using S&P 1500 index firms in the US for the

period 2006–2015. We document a significantly negative relation-

ship between board gender diversity and cash holdings. We also find

a strong negative effect of female independent directors consistent

with monitoring function. Moreover, in accordance with the critical

mass theory, we find a negative effect of female directors’ presence

and voice on cash holdings. Our findings are robust to alternative

econometric specifications, alternative measures of cash holdings

and corporate governance, difference-in-differences, propensity

score matching, and two-stage least squares. This study offers useful

insights into the current global debate on gender diversity and its

implications for firms.

KEYWORDS

cash holdings, corporate governance,gender diversity

JEL CLASSIFICATION

G30, G34, J16

1INTRODUCTION

Significant corporate scandals in recent times haveraised an interesting question in the literature: would the scenario

havediffered substantially if more women were appointed as corporate leaders in the US and around the world (Adams

& Funk,2012)? There are strong reasons to believe an affirmative answer to this question. Prior literature suggests that

female directors are less conformist and more vocal than their male counterparts (Carter,Simkins, & Simpson, 2003).

Further,female directors can bring to the board diverse perspectives and experiences that help resolve complex issues

through high-quality deliberations (Huang & Kisgen, 2013; Miller & del Carmen Triana,2009). In other words, gender

diverse boards engage more in competitive discussion, and thus decision-making is less likely to suffer from group-

think (Chen,Crossland, & Huang, 2016; Janis, 1982). More importantly, female directors enhance the legitimacy of firm

practices(e.g., Hillman, Shropshire, & Cannella, 2007), improve board effectiveness due to their unique capabilities and

workstyle, and serve as a substitute for corporate governance(e.g., Gul, Srinidhi, & Ng, 2011).

Extant literature also concurs that female directors make a significant difference in corporate decision-making.

Compared with male directors, female directors tend to focus more on corporate social responsibility (Shaukat, Qiu,

& Trojanowski, 2016), negotiate acquisitions efficiently with lower bid premiums (Levi, Li, & Zhang, 2014), makeless

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2019 John Wiley & Sons Ltd 1003

1004 ATIF ET AL.

risky financing and investment choices (Faccio, Marchica, & Mura, 2016), spend more on research and development

(R&D) (Miller & del Carmen Triana, 2009), and enhance firm performance measured by return on assets and return

on sales (Liu, Wei, & Xie, 2014).1In addition, female directors strengthen corporate governance mechanisms and are

associated with higher dividend payouts(Chen, Leung, & Goergen, 2017), higher stock price informativeness (Gul et al.,

2011), more audit efforts to ensure accountability (Gul, Srinidhi, &Tsui, 2008), and perform monitoring functions more

diligently (Adams & Ferreira,2009). The main drive for these studies is to establish board gender diversity as one of the

corporate governance mechanisms that improvesboard efficiency and decision-making, a stream of research that has

recently attracted a global focus.2

Corporate cash holdings, as a key corporate decision, provide liquidity to firms for their operational necessities.

However, excess cashholdings (non-operational cash holdings) are considered detrimental to shareholders’ wealth

due to lower returns and double taxation (Jensen, 1986; Opler,Pinkowitz, Stulz, & Williamson, 1999; Tong, 2010). The

most imperative reason to hold non-operationalcash is said to be associated with the agency problem that arises from

the opportunistic behaviour of managers (Jensen, 1986). Cash holdings (the most liquid asset) allow for managerial

discretionary and self-perquisite spending; for example, opportunistic managers use abundant cash reserves to shield

themselves against market scrutiny (including the financial press and analysts) because firms do not have to submit

to the external scrutiny of the capital market that occurs when external funding is needed (Harford, Li, & Zhao,

2008; Jensen, 1986, among others). Prior literature focuses on the role of corporate boards (as a whole) and on firm

characteristics (e.g., Fama, 1980; Harford et al., 2008; Myers & Majluf, 1984; Ozkan & Ozkan, 2004; Tong, 2010) in

mitigating the agency problem of cash-holding decisions. However, little is known in the empirical literature about

how board gender diversity as one of the corporate governance mechanisms can influence managerial opportunistic

behaviour in cash-holding decisions.

Tothe best of our knowledge, given the importance of cash-holding decisions, there is no study that examines the

relationship between board gender diversity and cash holdings except Zeng and Wang (2015). Theyfind a positive

association when examining the relationship between female CEOs and cash holdings using a sample of Chinese state-

owned enterprises (SOE) and non-SOE firms. Their findings lend support to women’s risk aversion behaviour, which

in turn suggests that such behaviour in female corporate leaders may render firms less competitivein the market, and

maycreate a glass ceiling for their career (Simpson, Ross-Smith, & Lewis, 2010). Nevertheless, their findings are limited

to the Chinese corporate governance structure, which is characterised by its higher proportion of female executive

directors, and lower level of board independence, compared with the US (see Chen et al., 2017; Liu et al., 2014).

Board independence plays an important role in improving corporate governancemechanisms. In particular, female

independent directors are associated with advisory and impartial advice. According to the resource dependence the-

ory,female independent directors help manage to reduce external risks inherent to firms through their competencies

(i.e., advice and council, legitimacy and communication) (Hillman & Dalziel, 2003) compared with female executive

directors who are managers and cannot provide independent advice to firms. Further,input from female directors on

the board may be considered to vary when they have a minority presence (Tanford & Penrod, 1984), and when the

minority group increases to a certain size, then the influence of the group members on decision-making also increases

substantially (Bear, Rahman, & Post, 2010; Torchia, Calabrò, & Huse, 2011). Kristie (2011) summarises this positive

change in minority group as: one female director on the board is a token, two are a presence and three are a voice(Liu

et al., 2014) that may also affect cash-holding decisions. These concerns have not been addressed in the prior study

(i.e., Zeng & Wang, 2015). In this paper, we examinewhether the presence of female directors on the board affects

corporate cash holdings by answering three critical research questions that remain unanswered in the literature:

1Carter,D’Souza, Simkins, and Simpson (2010) find no significant relationship between gender diversity and firm performance, which is consistent with Farrell

and Hersch (2005). Gyapong, Monem, and Hu (2016) examine the relationship between gender and ethnic diversity with firm value and report a positive

association.

2Forinstance, Norway promoted board gender diversity by mandating that 40 percent of board members be female and implemented the policy in 2008. Spain

mandated the same quota, which was met in 2015. Belgium, France, Germany,Netherlands, Sweden and the UK are considering the feasibility of imposing

a gender quota on their corporate boards. In the US, multiple research agencies, such as the Interfaith Center on CorporateResponsibility and the National

Associationof Corporate Directors Blue Ribbon Commission, all highly recommend board gender diversity to remove hurdles in women’s career advancement.