Research Paper Notes

Is the critical mass theory applicable to gender diversity in the boardroom and its impact on the financial
performance of a firm?

Introduction
● The first question we ask is whether firm values improve or decline as a result of the new board
structure mandated by the law. A finding of any effect, positive or negative, would be important
evidence that boards affect value.
○ First, if firms choose their board structures to maximize firm value, imposing binding legal
constraints on their choices will lead to declines in values (Demsetz and Lehn, 1985).
○ In contrast, the new law may lead to increases in value if firms choose their board structures
to maximize the private benefits of management, an argument known as the ‘captured boards’
hypothesis (Bebchuk and Fried, 2005).
○ To the extent that the forced addition of female directors reduces a CEO’s influence over the
board, the ‘captured boards’ hypothesis predicts that firm values will increase because agency
costs are reduced.
○ A third hypothesis predicts that the diversity enforced by the law change itself would increase
firm value (Page, 2007).
○ Finally, if boards are merely ‘window-dressing,’ the forced changes in board characteristics
will have no effect on firm value (Helland and Sykuta, 2004).
● We argue that personal characteristics of board members such as age, education, and professional
experience are also likely to directly affect a director’s ability to monitor and advise.

Notes for Literature Review

Paper 1: Gender Diversity in the Boardroom and Firm Performance: What Exactly Constitutes a "Critical
Mass?" (in dropbox folder)

● Authors: Jasmin Joecks, Kerstin Pull and Karin Vetter

● Source: Journal of Business Ethics
● Date: November 2013

Data & Variables Findings

- Hand collected panel data set of 151 listed - Gender diversity first negatively affects firm
German firms performance and - only after a "critical
- Time: 2000-2005 mass" of about 30 % women has been
- Firm performance as measured by return on reached - to be associated with higher firm
equity (ROE) performance than completely male boards
- Assigns values based on variables that were
created
- Uniform board: no woman
- Skewed board: at least one woman
but less than 20%
- Titled board: at least 20% but less
than 40%
- Balanced board: at least 40%

Interesting Points Limitations

- Germany does not force firms to abide by - The research is limited to an economy
gender regulations, it is voluntary. where there is no quota system for women
 - For the literature review, create a table
summarizing the findings.
Paper 2: Boardroom Diversity and Firm Value: Evidence from India
● Authors: Arunima Haldar, Reeta Shah, S.V.D. Nageswara Rao
Data & Variables
- Independent: Presence of women on board
- Dependent: Financial performance
- Economic Value Added (EVA)
- Market Value Added (MVA)
- Control: Firm size, organizational age
Interesting Points
- Women Directorships on Corporate Boards
show an increasing trend in numbers as well
as in percentage terms from 85 or 2.93% of
all Directorships in 2003 to 122 or 3.68 %
of all Directorships in 2013.
- Legislations brought by the government by
passing the Companies Bill 2013 may help
in building the women pipeline for board
rooms. - can be explored
Paper 3: Effects of Board Gender Diversity on Firm Performance and Director Compensation in India
● Authors: Christopher She Dongfa Siantar
● Source: University of California, Berkeley
Data & Variables
- Tobin's Q - Ratio of the firm’s market value
to its book value of assets - measure of firm
performance
Interesting Points
- Companies Act of 2013 as a source of
exogenous variation to determine how
gender diversity affects firm performance.
- India has been reported to be among the
lowest in the world in terms of women
representation in corporate governance
(Corporate Gender Gap Report, 2010).
allocation for jobs or occupations.
- The critical mass finding is inconclusive for
systems with women quotas.
- Analysis is limited to 5 years, which is a
short period.
- Limited to Germany and the publicly listed
firms there.
Findings
- significant positive relationship between
board diversity and firm value.
- the presence of women on board increases
with firm size and board size, but decreases
as the number of insiders increases.
Limitations
- Not from a reputed source (but gives info on
india)
- Hand collected data.
Findings
- No statistically significant correlation found
between an additional woman on the board
of a firm to a change in performance.
- The paper concludes that gender diversity of
board on firm performance does not
currently apply to the Indian context.
Limitations
- Sample was only collected for a 2 period
duration, and thus the impact was measured
in the short terms.
- The impact of woman on a board
may not have been significant in that
time duration and thus not reflected
in the results.
 - Most Indian women face a “glass ceiling”
during their careers owing to psychological
and societal expectations that men are the
sole breadwinners in a traditional Indian
family (Nandy et al, 2014).

In order to ascertain the true causal effect of having an additional women director on the board to the level
of firm risk, we will need to obtain a sample of data with financial information for a longer period before
and after the Companies Act of 2013.

Paper 6: Gender Diversity in the Boardroom and Firm Financial Performance (in dropbox folder)

● Authors: Kevin Campbell and Antonio Mínguez-Vera

● Source: Journal of Business Ethics
● Date: December 2008

Data & Variables Findings

- Panel data set from spain - non financial
firms
- Blau and Shannon indices to measure
impact of gender diversity on financial
performance of firms.
- Time period: 1995 to 2000
- Percentage of women: PWOMEN
- Positive effect on firm value found in
correlation with gender diversity on boards.
- Presence of one or two women is
insignificant to firm performance, however
the ratio of women to men has a positive
impact on firm value.
- The number does not directly correlate, but
the percentage does with the firm value.

Interesting Points Limitations

- First study conducted in the Spanish market. - Does not look into the qualifications of the
- Employ a causality test board members.
- There should be a balance between men and
women, rather than just the presence of
women.

Paper 7: THE CHANGING OF THE BOARDS: THE IMPACT ON FIRM VALUATION OF

MANDATED FEMALE BOARD REPRESENTATION

● Authors: Kenneth R. Ahern and Amy K. Dittmar

● Source: 18 August 2011
● Date: The Quarterly Journal of Economics

Data & Variables Findings

- -

Interesting Points Limitations

- -

Trends
- In many countries, there has been a pressure for governance reforms that may foster gender diversity
in the boardroom
- Norway was one of the first countries to impose a law in 2003 requiring public-limited
companies to fill at least 40 % of board positions with women by 2008
 - Spain followed Norway's example and enacted a law prescribing a 40 % quota of female
board members by 20
- India - Companies Act 2013
- Not only gender presence, but gender balance on boards is essential for benefit to firm
financial performance.

Companies Act of 2013

Background
● Norway was one of the first countries to impose a law in 2003 requiring public-limited companies to
fill at least 40 % of board positions with women by 2008. Spain followed. Norway's example and
enacted a law prescribing a 40 % quota of female board members by 20.
● Women Directorships on Corporate Boards show an increasing trend in numbers as well as in
percentage terms from 85 or 2.93% of all Directorships in 2003 to 122 or 3.68 % of all Directorships
in 2013.
● Legislations brought by the government by passing the Companies Bill 2013 may help in building
the women pipeline for board rooms. - can be explored
○ India has been reported to be among the lowest in the world in terms of women
representation in corporate governance (Corporate Gender Gap Report, 2010).
○ Most Indian women face a “glass ceiling” during their careers owing to psychological and
societal expectations that men are the sole breadwinners in a traditional Indian family (Nandy
et al, 2014).
○ In order to ascertain the true causal effect of having an additional women director on the
board to the level of firm risk, we will need to obtain a sample of data with financial
information for a longer period before and after the Companies Act of 2013.