Received: 18 November 2020 Revised: 23 January 2022 Accepted: 7 March 2022

DOI: 10.1111/corg.12443

ORIGINAL ARTICLE

Boardroom gender diversity and investment inefficiency: New

evidence from the United Kingdom

Sanaullah Farooq1 | Christopher Gan1 | Muhammad Nadeem2

1
Department of Financial and Business
Systems, Lincoln University, Lincoln,
New Zealand
2
Department of Accountancy and Finance,
University of Otago, Dunedin, New Zealand
Correspondence
Sanaullah Farooq, Department of Financial and
Business Systems, Lincoln University, Lincoln,
New Zealand,
Email: sanaullah.farooq@lincolnuni.ac.nz
Abstract
Research Question/Issue: Motivated by the recent regulatory reforms, in the forms
of the UK Corporate Governance Code (UK CGC) in 2011 and the enaction of
section 414C of the Companies Act 2006, to increase female representation on cor-
porate boards, this study investigates the effect of boardroom gender diversity
(BGD) on investment inefficiency (IE). These reforms were aimed at enhancing corpo-
rate governance by allowing a pool of female directors into directorship positions
and bringing fresher and independent perspective of female directors, thus strength-
ening board monitoring and its internal control systems. This study therefore seeks
to understand whether and how female directors align managers' and shareholders'
interests by improving investment efficiency.
Findings: Using a sample of UK listed firms from 2005 to 2018, this study provides
the first empirical evidence on the impact of BGD on IE. Consistent with our theoret-
ical predictions, we find a negative and statistically significant association between
BGD and IE. Furthermore, in a difference-in-differences analysis, we find a significant
impact of UK CGC on the BGD-IE relationship. We also identify three possible chan-
nels (board dynamics, stewardship effect, and information environment) through
which BGD is likely to affect IE. Finally, we also document that the said relationship
is more pronounced in firms with three or more female directors, which is consistent
with critical mass theory, and that BGD mitigates concerns surrounding both the
underinvestment and overinvestment decisions. Our main results are robust to endo-
geneity bias, alternative measures of BGD and IE, and controlling for potential bias
with a two-step investment estimation method.
Policy Implications: Our findings have important implications for regulators, policy-
makers, and other corporate stakeholders. Most importantly, the recent policy
initiatives on improving representation of female directors can strengthen board
monitoring and could reduce inefficient investments.

KEYWORDS
corporate governance, boardroom gender diversity, investment inefficiency, board dynamics,
stewardship

1 | I N T RO DU CT I O N sample of UK listed firms. According to the neo-classical framework,

investments must only be driven through their marginal Q-ratio
This study empirically examines the association between boardroom (Abel, 1983; Hayashi, 1982; Yoshikawa, 1980).1 However, as a result
gender diversity (BGD) and investment inefficiency (IE) based on a of low firm transparency (FT), managerial investments may deviate

2 © 2022 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/corg Corp Govern Int Rev. 2023;31:2–32.

FAROOQ ET AL.
from optimal levels because of moral hazard, such as managers pursu-
ing their own interests (Jensen & Meckling, 1976) or adverse selection
associated with managerial reluctance to raise capital at a discount
(Myers & Majluf, 1984). Proponents of the moral hazard theory pro-
vide several arguments on the divergence of managerial behavior
leading to poor investment decisions, such as investing excessively for
managerial empire building (Jensen, 1986; Stulz, 1990), enhancing
their professional reputation and future employment prospects
(Aggarwal & Samwick, 2003), and growing their salary (Conyon &
Murphy, 2000; Jensen & Murphy, 1990; Lei et al., 2014). Several stud-
ies discuss managerial career concerns leading to poor investment
choices, such as managers investing in investment projects related to
their skills and expertise (Shleifer & Vishny, 1989), thus diversifying
their employment risk (Amihud & Lev, 1981). Models of adverse selec-
tion suggest that low FT may prevent managers from raising funds at
low cost of capital resulting in subsequent underinvestment (Biddle
et al., 2009; Myers & Majluf, 1984). Regardless of the specific cause
of managerial poor investment choices, the literature suggests that
poor investment decisions can have adverse consequences on firm
performance. The literature investigating the impact of inefficient
investments on firm performance shows that high investments in
firms prone to overinvestment lead to negative subsequent stock
returns (Cooper et al., 2008; Titman et al., 2004) and poor future
operating performance (Fu, 2010; Li, 2004).
A board of directors appointed by shareholders is meant to act as
an effective control system to supervise managerial decisions. It
involves overseeing and scrutinizing strategic corporate decisions
undertaken by the managers (Liu et al., 2014; Zaman, Atawnah,
Baghdadi, et al., 2021). Most importantly, corporate boards are autho-
rized to make vital decisions such as appointing and firing senior exec-
utives (Fama & Jensen, 1983) and improving the overall information
environment (Armstrong et al., 2014). However, during recent
decades, the failure of corporate boards to provide effective supervi-
sory oversight is evident in a series of corporate scandals and bank-
ruptcies around the globe. This resulted in regulatory calls to overhaul
corporate boards such as restructuring them, to establish efficient
boards with superior governance. In 2011, the UK Financial Reporting
Council (FRC) included recommendations in the UK Corporate Gover-
nance Code (UK CGC), requiring UK listed firms to report in their
annual reports on the board's gender policy, measurable objectives on
gender diversity, and the progress in achieving these objectives
(FRC, 2011). In 2013, the UK Government further tightened the rules
by requiring UK firms to disclose the proportion of females in their
boardroom (Companies-Act, 2006). Overall, these reforms were to
boost board monitoring and reduce agency conflicts by breaking the
old boys' network (Adams et al., 2010) and improving the availability
and appointment of a better qualified pool of females for directorships
(Eagly & Carli, 2003; Hillman et al., 2007). These women would bring
a fresher, independent perspective (Capezio & Mavisakalyan, 2016) as
they are less likely to adhere to the prevailing board culture (Konrad
et al., 2008). However, evidence on the efficacy of these reforms and
whether these reforms make a business case, or a case for gender
equality, are still under investigation in recent literature.
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3
Literature on BGD indicates that firms with female directors are
better governed (Adams & Ferreira, 2009; Schwartz-Ziv, 2017) and
have superior internal controls (Abbott et al., 2012; Chen,
Eshleman, et al., 2016). Female directors tend to reduce agency costs
through reducing excess free cash flows through dividends (Byoun
et al., 2016; Chen et al., 2017), and these firms have lower information
asymmetry (Gul et al., 2011; Gul et al., 2013; Nadeem, 2020). How-
ever, empirical evidence on the efficacy of female directors on direct
measures of inefficient investments is still unclear. Those few BGD
studies investigating the association between BGD and investments
have mainly focussed on acquisitions (Chen, Crossland, et al., 2016;
Dowling & Aribi, 2013; Levi et al., 2014), efficiency of R&D invest-
ments (Chen, Leung, et al., 2018; Chen, Ni, et al., 2016), or asset turn-
over ratio (Bennouri et al., 2018).
Therefore, motivated by the recent regulatory upsurges and the
gap in the current body of literature, we explore the association of
female directors with IE. More specifically, we explore the impact of
BGD on direct measures of IE using the optimal investment models of
Chen et al. (2011) and Biddle et al. (2009). As the purpose of the 2011
UK CGC was to encourage firms to appoint female directors on cor-
porate boards, we also examine the impact of this legislation on the
relationship between BGD and IE. Furthermore, we identify and
empirically test the possible channels through which BGD is likely to
affect IE. Finally, given the nature of UK's disclosure-based BGD, reg-
ulations can lead to “tick-box” compliance and the predictions of
token status and critical mass theory (CMT) that only the higher repre-
sentation of female directors may bring the desired monitoring out-
come. We therefore also investigate whether a greater number of
female directors have a more pronounced effect in mitigating IE.
Our findings reveal that female directors have a negative and sta-
tistically significant impact on IE, meaning that BGD significantly
improves investment efficiency. This finding is in line with our theo-
retical predictions that female directors indeed improve corporate
governance and influence strategic corporate decision-making,
thereby increasing firm value by reducing inefficient investments. We
then perform a difference-in-differences analysis based on the 2011
UK CGC and find that the code has a significant impact on the
BGD-IE relationship, meaning that the BGD-IE relationship is stronger
post UK CGC. This finding endorses the gender legislation in the
United Kingdom in particular and around the world in general that
increased female representation on boards to improve firm value. We
then explore the diverse mechanisms through which BGD may be
associated with IE. More specifically, we find that BGD improves the
board dynamics, stewardship effect, and information environment, all
of which have positive impacts on investment efficiency. Finally, we
show that firms with three or more female directors have a more pro-
nounced effect on IE, which is consistent with CMT. Finally, we also
show that BGD-induced improvement in investment efficiency is
driven by reduction in both overinvestment and underinvestment.
Our findings are robust to multiple proxies of BGD and IE. We also
address endogeneity concerns in a battery of addition analyses and
correct for possible bias with the two-step investment method based
on Chen, Hribar, et al. (2018).

4 FAROOQ ET AL.
We make important contributions to corporate governance and
firm value literature. Given the increasing pressure faced by firms to
increase female representation on corporate boards and the impor-
tance of investment efficiency for firm value, we provide new evi-
dence for a business case for female directors. Our empirical evidence
shows that female directors indeed make significant contributions by
improving corporate governance. These findings will be particularly
important for policy-makers in devising effective governance mecha-
nisms vital for protecting shareholder/stakeholder interests.
The remainder of the paper is organized as follows. We overview
the regulatory background in Section 2. Section 3 presents the rele-
vant literature and hypothesis of the study. Section 4 outlines the
methodology and presents the description of the variables. Section 5
presents results and discussion, and Section 6 concludes this study.
2 | REGULATORY BACKGROUND
In October 2011, the UK FRC adopted regulations on BGD in the UK
CGC (FRC, 2011). From 2012, as per the UK CGC Provision B.2.4, a
separate section in annual reports must clearly disclose a firm's work
of the nomination committee and the process it has applied in making
board appointments. Firms are also required to disclose their policy
on gender diversity, measurable objectives it has established, and the
advances in achieving those objectives in female representation on
the board (FRC, 2012). The Supporting Principle B.2 requires firms to
nominate and recruit to boards on merit with special consideration
given to achieving BGD in such recruitment (FRC, 2012).
Further in 2013, the UK government implemented the Companies
Act 2006, section 414C, which requires all UK firms to disclose every
year in their strategic report the number of male and female directors,
employees, and senior executives (Companies-Act, 2006). In
2016, the UK Financial Conduct Authority (UK FCA) issued new Dis-
closure and Transparency Rules (DTRs). DTR 7.2.8A(R) requires all UK
firms listed in EU markets to state their diversity policy in the corpo-
rate governance statement, and if no diversity policy is disclosed, then
an explanation of the nondisclosure must be made (FCA, 2016). Regu-
lators are introducing more stringent targets for firms to deter “tick
the box” compliance practices and make female representation on
boards more balanced. The Hampton-Alexander Review, which acts
as a UK government-backed independent review council, had vowed
to achieve at least 33% women representation for all FTSE 350 firms
by 2020 (Hampton-Alexander, 2018).
3 | LITERATURE REVIEW AND
HYPOTHESIS DEVELOPMENT
3.1 | Agency theory (AT) perspective
Based on the AT, separation of ownership and control between man-
agers and shareholders can give rise to information asymmetry, where
actions of the agent are not visible to the principal (Jensen &
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Meckling, 1976; Zaman, Atawnah, Haseeb, et al., 2021). From an
investment viewpoint, high information asymmetry can result in moral
hazard problems such as empire building (Jensen, 1986; Stulz, 1990),
managerial entrenchment and salary expropriation (Chen et al., 2013;
Shleifer & Vishny, 1989), failing to invest in profitable investments
(Aggarwal & Samwick, 2006; Bertrand & Mullainathan, 2003), or
adverse selection (Myers & Majluf, 1984). To mitigate agency conflicts
and protect shareholders' interests, corporate boards act as the first
line of defense. They can resolve agency conflicts through: (1) offering
stringent monitoring and scrutinizing managerial actions (Fama &
Jensen, 1983; Liu et al., 2014) and (2) a better information environ-
ment (Armstrong et al., 2014; Enache & Hussainey, 2020;
Nadeem, 2020).
In terms of stringent monitoring, prior studies document that
firms with gender diverse boards are better governed and have supe-
rior internal controls. Female directors who actively participate in
board monitoring and decision-making are more likely to be members
of governance subcommittees, have better board meeting attendance
rates, and are more likely to offer equity-based compensation
(Adams & Ferreira, 2009). Gender diverse boards request more infor-
mation for scrutiny and provide suggested directions to managers
(Gyapong et al., 2021; Schwartz-Ziv, 2017). This is because board
diversity brings together people with different characteristics and
opinions who are likely to ask more questions, which enhance a
board's independence (Carter et al., 2003). Female directors ensure
the integrity of a firm's internal control systems in many ways to miti-
gate ethical dilemmas arising from managers. Studies have shown that
these firms have significantly low occurrence of restatements of
financial reports (Abbott et al., 2012) and a lower likelihood of
accounting fraud (Capezio & Mavisakalyan, 2016; Cumming
et al., 2015). In addition, the presence of female directors in corporate
boardrooms changes the board dynamics drastically. Female directors
actively monitor their male colleagues (Gonzalez et al., 2014) and are
less likely to tolerate poor managerial performance (Schwartz-
Ziv, 2017). Moreover, female directors may limit opportunistic self-
serving behavior of managers by bringing an external layer of monitor-
ing such as external auditors (Aldamen et al., 2018; Gul et al., 2008;
Lai et al., 2017) or external capital providers (Byoun et al., 2016; Chen
et al., 2017). These arguments indicate that firms with gender diverse
boards have strong governance and can thus mitigate the moral haz-
ard problem. In the context of UK, prior empirical studies provide evi-
dence that BGD lowers agency problems (e.g., Dowling & Aribi, 2013;
Nadeem et al., 2019).
The BGD literature also suggests that female directors enhance a
firm's information environment by reducing the information asymme-
try between managers and shareholders. Firms with female directors
have superior financial reporting quality (FRQ) (Arun et al., 2015;
Srinidhi et al., 2011; Strydom et al., 2017) and make more firm-
specific disclosures (Ahmed et al., 2017; Gul et al., 2011;
Nadeem, 2020), resulting in more accurate analyst earnings forecasts
(Gul et al., 2013). Accuracy in FRQ and timely disclosure of informa-
tion improve market confidence in accurately predicting a firm's
future performance.

FAROOQ ET AL.
3.2 | Resource dependence theory (RDT)
perspective
According to the RDT perspective, a firm's survival depends on exter-
nal resources and boards can benefit firms by sourcing them from
external entities (Pfeffer, 1972; Pfeffer & Salancik, 1978). Hillman
et al. (2007) argue that gender diverse boards are more effective in
establishing linkages and gaining these critical resources through their
(1) advisory role, (2) legitimacy, and (3) communication. In terms of the
advisory role, gender diverse boards may have female directors with
extra competencies and skills. These female directors reach the upper
echelon of corporations through their extraordinary abilities and com-
petencies (Eagly & Carli, 2003), unlike male director appointments,
where connectivity and the old boys' network plays a vital role
(Adams et al., 2010). Therefore, female directors are less likely to con-
form to the prevailing board culture but provide a fresher, indepen-
dent perspective when carrying out their monitoring and advisory
roles (Capezio & Mavisakalyan, 2016). Heterogeneous boards bring
diverse viewpoints (Ray, 2005) and are less likely to engage in group
thinking (Chen, Crossland, et al., 2016).
Female directors conduct thorough investigation and in-depth
scrutiny of impending issues (Huang & Kisgen, 2013) and request
more information for decision-making than male directors (Gul
et al., 2008). In board meetings, they request more information and
are likely to provide more suggestions to boards (Schwartz-Ziv, 2017).
This creates a richer information environment for extensive board
level discussions, and the board has detailed information available for
assessing managerial decisions (Abad et al., 2017; Gul et al., 2011),
thus boosting the monitoring effectiveness of these boards. Thus, we
can conclude that gender diverse boards are more active in monitor-
ing managerial decisions, which, by extension, can mitigate opportu-
nistic activities.
In terms of legitimacy, the “value in diversity” hypothesis argues
that firms tend to gain legitimacy from society by increasing the pro-
portion of female directors (Cox et al., 1991). Liu et al. (2014) and
Nadeem (2020) highlight the communication role of female directors
in arguing that female directors can better connect with external enti-
ties and female customers through better socialization and communi-
cation skills. Through the lens of RDT, firms with female directors can
reduce inefficient investments by establishing legitimacy and effective
communication channels with their stakeholders in many ways. First,
the “legitimacy effect” of female directors' appointment is reflected in
positive stock market returns on appointment (Adams et al., 2010;
Kang et al., 2010) and the potential channel could lower the cost of
capital for these firms (Pandey et al., 2019), implying the availability of
capital at a lower cost for underinvesting firms. Second, in terms of
communication, firms with female directors are better able to use
their superior communication skills to inform their stakeholders, such
as external capital suppliers, about the availability or unavailability of
valuable investment opportunities and reduce investor's uncertainty
about the future prospects of the firm's investments. Based on this
clear communication, capital providers can ease or restrict the supply
of capital for firms with valuable investment opportunities and limit
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5
the supply of capital to firms with nonvaluable investment
opportunities.
3.3 | Board gender diversity and corporate
investments
Empirical literature exploring the association between BGD and capi-
tal investment is scant. Levi et al. (2014) find that the BGD reduces
the number of acquisition bids by 7.5%, and the addition of each
female director reduces the bid premium by 15.4%. Dowling and
Aribi (2013) find that the BGD reduces the acquisitiveness of FTSE
100 firms as measured by acquisition size. Chen, Crossland,
et al. (2016) show that US firms with BGD have a smaller acquisition
size. The literature associates acquisitions with managerial empire
building (Jensen, 1986), managerial irrational overconfidence
(Huang & Kisgen, 2013; Lonkani, 2019) or managerial self-interest by
expropriating higher compensation in the short term through acquisi-
tion whereas its success is unknown in the long term (Haleblian
et al., 2009).
Several studies suggest that investment decisions in firms with
BGD can be more efficient. Jurkus et al. (2011) investigate Fortune
500 firms and show that the gender diversity in top management miti-
gates agency costs. Zeng and Wang (2015) document that female
CEOs mitigate the consumption of free cash flows in overinvest-
ments. Chen, Ni, et al. (2016) show that the impact of R&D invest-
ment on proxies of uncertainty2 is less positive in firms with female
directors. This may indicate that the market may have greater confi-
dence in the efficiency of these investments. Chen, Leung, et al. (2018)
find that for a given level of R&D investments, firms with BGD are
more successful in obtaining innovation. More recently, Bennouri
et al. (2018) show that the BGD improves the asset turnover ratio,
which suggests the efficiency of these firms in using their assets to
generate revenue.
3.4 | Hypothesis
Based on the theoretical predictions of AT, RDT, and recent BGD
empirical literature, we argue that firms with female directors will
reduce IE through three channels, namely, board dynamics, steward-
ship effect on CEOs, and information asymmetry, as shown in
Figure 1. With regard to the first channel, that is, board dynamics, we
argue that gender diverse boards will reduce IE through board gover-
nance. For instance, gender diverse boards are more likely to ask
questions about firm level investments during board meetings and will
objectively assess the viability and profitability of new investments.
Discussions at the board level will be more intense, and executive rec-
ommendations will be thoroughly examined in firms with female rep-
resentation on boards. Investments associated with managerial
expropriation are more likely to be discovered (Chen,
Crossland, et al., 2016) and are less likely to proceed (Huang &
Kisgen, 2013; Levi et al., 2014). Furthermore, we posit that during

6 FAROOQ ET AL.
F I G U R E 1 Theoretical framework [Colour figure can be viewed at
wileyonlinelibrary.com]
board meetings, female directors will thoroughly scrutinize the perfor-
mance of prior investments, further inquire on the comparability of
firm investment practices with its industrial peers, and further investi-
gate growth opportunities. Investments associated with uncertain
outcomes such as risky acquisition deals (Chen, Crossland, et al., 2016)
or inefficient investment projects causing persistent losses will be
quashed by gender diverse boards.
A major portion of board monitoring and decision-making process
is dependent on the information it acquires from board subcommit-
tees. Adams and Ferreira (2009) have shown that female directors are
more likely to be members of governance subcommittees and have a
better board attendance record. Governance subcommittees perform
narrower governance tasks, such as those related to audit, remunera-
tion, and nominations. Carter et al. (2010) and Green and
Homroy (2018) argue that because subcommittee members perform
narrower governance tasks, they provide information to the board
based on which major board decisions are taken. Hence, female repre-
sentation on corporate boards is likely to improve board dynamics,
which in turn reduces IE.
The second channel is the stewardship effect on CEOs according
to which the opportunistic behavior of managers can be kept under
control by providing more equity-based compensation and keeping
CEOs accountable for poor firm performance. It involves aligning
CEOs interests with shareholders by linking CEO compensation with
firm performance through offering equity-based compensation
(Adams & Ferreira, 2009; Nadeem, 2021a; Zaman, Atawnah,
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Baghdadi, et al., 2021). Prior studies (e.g., Adams & Ferreira, 2009)
have shown that firms with BGD are more likely to have directors'
compensation tied to firm performance. Eagly and Carli (2003) argue
that female directors, due to their higher competency, take their fidu-
ciary roles seriously. Thus, managerial performance linked to poor
investment decisions is more likely to be scrutinized and held
accountable. The empirical evidence indeed show that gender diverse
boards are more likely to dismiss poorly performing managers
(Adams & Ferreira, 2009; Schwartz-Ziv, 2017). Based on the foregoing
arguments, we expect that the stewardship effect produced by BGD
through alignment of CEO interests with firm performance in the form
of equity-based compensation and the threat of dismissal will create
stewardship effect in regulating their investment decisions.
Third, firms with BGD have a better information environment
(Abbott et al., 2012; Aldamen et al., 2018; Chen, Eshleman, et al., 2016)
and are more likely to communicate to stakeholders about the avail-
ability of profitable investments (e.g., Gyapong et al., 2021;
Nadeem, 2020). Such a rich information environment in firms with
female directors raises market confidence in the availability of positive
net present value (NPV) investments and that investments are well-
protected, therefore easing the supply of capital such as the cost of
capital (Pandey et al., 2019). This will lead firms to procure financing
at a low cost of capital to finance valuable investment opportunities.
Empirical findings from prior literature also suggest that BGD reduces
poor investments (Bennouri et al., 2018; Chen, Crossland, et al., 2016;
Chen, Leung, et al., 2018; Chen, Ni, et al., 2016; Levi et al., 2014).
Thus, based on the foregoing arguments, we hypothesize the follow-
ing relationship.
H1. : Board gender diversity is negatively associated
with investment inefficiency.
4 | DAT A AN D M ET H OD
4.1 | Sample
This study uses data of the firms listed on the UK stock exchange
for the 14 years between 2005 and 2018. The Bloomberg and
BoardEx databases were used to collect all governance, investment,
and financial data. We followed Gomariz and Ballesta (2014) and
started our sample selection for all the firms in our database.3 Our
initial sample consisted of 4884 firm-year observations for which
BGD and governance data were available. The estimation of our IE
proxies required using lagged values up to 2 years, which further
trimmed our sample to 3359 firm-year observations due to missing
values. We further deleted all those observations with missing data
on control variables. Our final sample is an unbalanced panel of
3154 firm-year observations. To mitigate survivorship bias, our sam-
ple includes data for all active and inactive firms during the sample
period. To eliminate measurement error as a result of spurious out-
liers, all the continuous variables are winsorized at the 1st and 99th
percentile.

FAROOQ ET AL.
4.2 | IE
Theoretically, a firm must undertake all positive NPV projects and
therefore in a perfect capital market, firm investment is only driven by
its growth opportunities (Abel, 1983; Hayashi,
Yoshikawa, 1980). Any deviation of firm investments, that is, not in
line with its growth opportunities will lead to IE. Studies such as Chen
et al. (2011) propose a model that predicts firms' optimal investments
in terms of their growth opportunities. More specifically, any portion
of firm level investments, higher or lower than the optimal investment,
is categorized as inefficient.
Following Chen et al. (2011), our first proxy of IE is estimated
using their parsimonious model of expected investment. According
to this model, optimal investment is predicted based on a firm's
growth opportunities, that is, measured by its negative sales growth
or positive sales growth. We estimate the following piecewise linear
regression:
ITOTAL,i,t ¼ β0 þ β1 Negi,t1 þ β2 Sales Growthi,t1 þ β3 Neg
 Sales Growthi,t1 þ εi,t
where ITOTAL is the total investment measured as the sum of CAPEX,
Acquisitions, R&D Expenses minus Sale of PPE for firm i in year t; Sales
Growth is the firm's annual sales growth from t-2 to t-1 for firm i in
year t-1; Neg is a dummy variable that equals “1” if Sales Growth is
negative and “0” otherwise; and NEG*Sales Growth is the interaction
between Neg and Sales Growth. Chen et al. (2011) argue that invest-
ments may differ due to an increase or decrease in sales, thus allowing
for more accurate predictability of investment, a negative interaction
with sales growth was introduced to the model. Following prior stud-
ies, the ITOTAL is scaled by the lagged assets (Biddle et al., 2009; Chen
et al., 2011).
We gauge the expected investment by estimating Equation (1)
cross-sectionally across each year and industry. The residuals from
the above regression model quantify the degree of deviation of firm
investments from the expected levels. We convert all negative
residuals to positive numbers by multiplying them by “1” and
use the absolute values of the estimates of IE. Thus, a higher
value of residuals represents higher inefficient investment (IE_Cheni,t
= jϵ i,tj).
We also use the expected investment model proposed by Biddle
et al. (2009), which is also used in the Gomariz and Ballesta (2014)
study. This model estimates the expected investments as a function
of growth opportunities, as shown in Equation (2).
ITOTAL,i,t ¼ β0 þ β1 Sales Growthi,t1 þ εi,t
where ITOTAL is the total investment. Once again, total investment
(ITOTAL) is scaled by lagged total assets. Sales Growth is a firm's annual
sales growth from t-2 to t-1 for firm i in year t-1. We use absolute
values of the residuals from Equation (2) by multiplying negative resid-
uals with “1” and label it (IE_Biddle i,t = jϵ i,tj).
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7
4.3 | Independent variables
Our primary BGD variable is a dummy variable and takes the value of
“1” if a board of a particular firm-year observation has at least one
1982; female director and “0” otherwise (D_GenderDiv) (Abbott et al., 2012;
Adams & Ferreira, 2009; Gul et al., 2013). We also measure BGD
based on the proportion of female directors in the boardroom (P_Gen-
derDiv). The proportion of female directors measures the number of
female directors relative to the size of the board (Gul et al., 2011; Levi
et al., 2014; Liu et al., 2014; Schwartz-Ziv, 2017). Our third proxy of
BGD is the total number of female directors on the board (N_Gen-
derDiv). This measure is consistent with prior studies (Arun
et al., 2015; Carter et al., 2010; Dowling & Aribi, 2013; Gul
et al., 2011).
4.4 | Control variables
We include several control variables that can confound our findings.
ð1Þ
Prior studies have argued that financial obligations associated with
debt payment may reduce excess cash flows, thus leverage may
reduce firm investments (Jensen, 1986; Myers, 1977; Stulz, 1990).
We measure leverage by the sum of short-term and long-term debt
scaled by the book value of total debt and equity. Older and larger
firms have a more visible presence (Hou et al., 2012) and have more
experience in doing business and may therefore invest more effi-
ciently (Stoughton et al., 2017). Therefore, we control for firm age
(Log_Age) and size (Log_Assets) which is measured as the natural log-
arithm of total assets. Tangibility proxies for the financial constraints
that determine a firm's ability to borrow, which can be invested.
Prior studies (Chen et al., 2011; Lara et al., 2016; Stoughton
et al., 2017) show a statistically significant positive association
between investments and a firm's tangibility. Therefore, we control
for Tangibility that is the proportion of a firm's PPE to its total
assets. Morgado and Pindado (2003) suggest that a firm may invest
more if it has high growth opportunities. Thus, we include Book-to-
Mkt as an additional control variable. The term σInv represents the
volatility of total investment in past 3 years. A one-time high invest-
ment results in subsequent underinvestment. Biddle et al. (2009)
(p. 117) suggest that σInv captures the effects of the “relation
between over and underinvestment and investment volatility”. Follow-
ing Chen et al. (2011), we measure σInv by taking the rolling stan-
dard deviation of total investment in the past 3 years. We also
expect that highly transparent firms have low information asymme-
try and may have better monitoring by external capital providers
ð2Þ and lower levels of IE. We proxy for FT based on the accuracy of a
firm's FRQ. Following Biddle et al. (2009), Gomariz and
Ballesta (2014), and Shen et al. (2015) we estimate the measure of
FRQ based on the McNichols and Stubben (2008) model of discre-
tionary revenue, estimated as:
ΔAR,i,t ¼ β0 þ β1 ΔSalesi,t1 þ εi,t ð3Þ

8 FAROOQ ET AL.
where ΔAR represents the annual change in account receivables for
firm i in year t and ΔSales measures the annual change in sales reve-
nue for firm i from year t-2 to t-1. Equation (3) is estimated cross-
sectionally across each year and industry. The discretionary revenues
as measured by the error term represent changes in account receiv-
ables that are not explained by revenue growth. We take the absolute
estimates from the residuals and multiply by “1”. Therefore, a higher
value represents superior FRQ (FRQ i,t = jϵ i,tj).
We expect that higher levels of cash are more likely to be
invested inefficiently (Chen, Sun, et al., 2016; Huang et al., 2015).
Therefore, we control for liquidity in terms of Slack (sum of cash and
short-term investments scaled by lagged total assets), OperCycle (sum
of days' sales in inventory plus the accounts receivable days), and Divi-
dend (an indicatory variable that equals “1” if firm i has paid any divi-
dend in year t and “0” otherwise). Dividend payments reduce excess
cash flow that otherwise could be invested sub optimally
(Officer, 2011). Losses is a dummy variable equal to “1” if net income
before extraordinary items is negative. In addition, we also control for
risk of financial distress (Altman Z). We employ a proxy for a firm's
bankruptcy risk measured by the Altman (1968) Z-score.
We also control for several board characteristics that may be
associated with investments. We control for board independence
(BoardInd) measured as the ratio of independent directors to total
directors, board size (BSize) equals to total board members, and CEO
duality (Duality) is an indicator equal to 1 if the CEO also holds chair
positions. Based on the AT, independent directors are more effective
in curbing the managerial opportunistic activities (Fama
Jensen, 1983). Board independence has shown to improve the quality
of investments (Chen, Sun, et al., 2016; Dowling & Aribi, 2013; Huang
et al., 2015). For board size, larger boards maybe ineffective because
of a lack of coordination and communication problems (Jensen, 1993).
Empirical evidence shows that firms with large boards are less acquisi-
tive (Chen, Crossland, et al., 2016; Cheng, 2008). We also control for
Duality since CEOs who are also board chairs can control board meet-
ings by organizing the agenda and deciding what information to pre-
sent (Haniffa & Cooke, 2002). This may hamper the board's
monitoring in reducing discretionary investments.
4.5 | Empirical model
We use ordinary least squares (OLS) regressions, with the
Petersen (2009) two-dimensional clustered robust standard errors at
the firm and year level to test our main hypothesis. This is a robust
method that adjusts standard errors for potential heteroscedasticity,
cross-sectional, and time-series dependence so improving the accu-
racy of our estimates.
To test our hypothesis (H1), that is, the impact of BGD on IE, we
estimate the regression Equation (4) as follows:
X X
IEi,t ¼ β0 þ β1 GenderDivi,t þ γ j Controlj,i,t þ фj Ind þ εi,t
where IE denotes investment inefficiency, GenderDiv represents the
proxies of BGD, and Control represents a series of control variables.
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We also control for industry specific effects represented by Ind. We
predict that GenderDiv improves the efficiency of investments; there-
fore, we expect the coefficient on GenderDiv to be negative and sta-
tistically significant. The definitions and estimation of these variables
are summarized in Table 1.
5 | RESULTS AND DISCUSSION
5.1 | Descriptive statistics
Table 2 reports the mean, median, standard deviation, maximum and
minimum of all dependent, independent, and control variables of the
study. Panel A in Table 2 reports the statistics for the IE variables. As
for the IE, the mean is 10.3% of lagged assets when measured by the
Chen et al. (2011) model. The magnitude of these IE in the sample is
comparable with other studies. For example, the literature reports an
average IE of 10% in US firms (Stoughton et al., 2017), 8.6% for a
sample of Spanish firms (Gomariz & Ballesta, 2014), and 6.7%
reported from Taiwan (Huang et al., 2015). The higher values of IE
may imply that the UK firms are investing inefficiently; however, the
lower median value of IE to its corresponding mean suggests that a
small number of firms make a relatively larger amount of inefficient
investments.
Panel B in Table 2 reports the descriptive statistics of the inde-
pendent variables. On average, 76.3% of UK boards have at least one
& female director (D_GenderDiv), which is comparable with 72.6%
reported for a US sample by Gul et al. (2013). However, it is still lower
compared with 78% in China (Nadeem, 2020). The mean proportion
of female directors (P_GenderDiv) on the UK boards is 15%, which is
higher than the 9.5% on the US boards (Levi et al., 2014), the 11.3%
reported for China (Nadeem, 2020), and 10.72% for France
(Bennouri et al., 2018). The mean (median) number of female directors
(N_GenderDiv) on UK boards is 1.354 (1). This shows that at least half
of UK boards have just one female director, thereby indicating
that UK boards may be including one female director as “tokens” to
be compliant with the UK CGC regulations to be considered in the
“portfolio of gender diverse organizations.” The average is, however,
higher than the US where corporate boards on average have one
female director (Gul et al., 2011). The mean values of D1_GenderDiv,
D2_GenderDiv, and D3_GenderDiv show that about 36.2%, 25.3%, and
14.7% firm-years have one woman, two women, and three or more
women directors, respectively, that is, higher than the 36.5%, 17%,
and 7.5% in China (Liu et al., 2014). Finally, 23.8% of firm-years in
our sample have completely homogenous boards with no female
directors.
5.2 | Bivariate analysis
ð4Þ 5.2.1 | Correlation analysis
We began the empirical analysis by estimating a pairwise Pearson cor-
relation between all dependent and independent variables. The results
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FAROOQ ET AL. 9

TABLE 1 Definition of variables

Variable in the investment model

ITOTAL = sum of Capital Expenditures, Acquisition, Research & Development Expenses, minus Sale of PPE. All variables are divided by the total
assets in t-1.
SalesGrowth = annual percentage sales growth from year t-2 to t-1.
Neg = dummy variable that takes the value of “1” if SalesGrowth has negative value and “0” otherwise.
Dependent variable
IE_Chen = proxy of investment inefficiency from Equation (2). Estimated as the absolute value of the residuals of the following investment
model:
ITOTAL,i,t ¼ β0 þ β1 Negi,t1 þ β2 Sales Growthi,t1 þ β3 Neg  Sales Growthi,t1 þ εi,t
IE_Biddle = proxy of investment inefficiency from Equation (3). Estimated as the absolute value of the residuals of the following investment
model:
ITOTAL,i,t ¼ β0 þ β2 Sales Growthi,t1 þ εi,t
Independent variable
D_GenderDiv = an indicator value that takes the value of “1” if a board of a particular firm-year observation contains at least one female director
and “0” otherwise.
P_GenderDiv = represents the proportion of female directors in a corporate boardroom measured as total number of female board members
divided by board size.
N_GenderDiv = represents the total number of female directors in a corporate boardroom.
D1_GenderDiv = indicator value which takes the value of “1” if a board has one female director and “0” otherwise.
D2_GenderDiv = indicator value which takes the value of “1” if a board has two female directors and “0” otherwise.
D3_GenderDiv = indicator value which takes the value of “1” if a board has three or more female directors and “0” otherwise.
Other control variables
Lev = total ST and LT debt divided by sum of BV of debt and common equity.
Log_Age = natural logarithm of number of years since firm was first incorporated.
Log_Assets = natural logarithm of total assets.
Tangibility = firm fixed assets scaled by its total assets.
Book_to_Mkt = ratio of book value of total common shareholders equity to its market value.
σInv = investment volatility measured by taking the rolling standard deviation of total investment (ITOTAL) in the past three years.
FRQ = FRQ proxy based on McNichols and Stubben (2008) model of discretionary revenues. Estimated as the absolute value of the
residuals of the following model:
ΔAR,i,t ¼ β0 þ β1 ΔSalesi,t1 þ εi,t
Slack = sum of cash and ST investments divided by total assets in t-1.
Opercycle = natural log of sum of days sales in inventory plus the account receivables days.
Dividend = an indicator variable that takes the value of “1” if a firm has paid any dividends and “0” otherwise.
Losses = an indicator variable that takes the value of “1” if a firm's net income before extraordinary item is negative and “0” otherwise.
Altman Z = measure of bankruptcy risk from Altman (1968) model calculated as:
ZScore ¼ 0:012  X1 þ 0:014  X 2 þ 0:033  X 3 þ 0:0006  X 4 þ 0:999  X5
Where: X1 = working capital/total assets X2 = retained earnings/total assets; X3 = EBIT/total assets; X4 = MV of equity/BV of debt;
and X5 = sales/total assets.
BoardInd = proportion of independent directors on corporate board.
BSize = total number of directors in corporate board.
Duality = an indicator variable that takes the value of “1” if a CEO is also the board chair and “0” otherwise.
Ind = represents dummies that control for industry effects based on level 1 industrial classification benchmark (ICB).

Source: Bloomberg Professional Services (BPS), BoardEx, authors' calculations, London Stock Exchange (LSE) and annual reports.

in Table 3 show that both proxies of IE have a negative correlation correlations between IE_Chen and D3_GenderDiv are stronger
with the BGD measures, suggesting that female directors reduce inef- (r = 0.0758) than 0.0366 for D2_GenderDiv and 0.0035 for
ficient investments. The correlation coefficients between the proxies D1_GenderDiv. This may indicate a stronger mitigating impact of
of IE and P_GenderDiv hover between 0.1045 and 0.1156. The boards with three or more female directors on inefficient investments.
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10 FAROOQ ET AL.

TABLE 2 Descriptive statistics

Variable N Mean St. dev. Median Max Min
Panel A: Investment inefficiency
IE_Chen 3154 0.103 0.125 0.066 1.209 0
IE_Biddle 3154 0.098 0.115 0.062 1.1 0
Panel B: Independent variables
D_GenderDiv 3154 0.763 0.426 1 1 0
P_GenderDiv 3154 0.150 0.113 0.143 0.600 0
N_GenderDiv 3154 1.354 1.092 1 6 0
D1_GenderDiv 3154 0.362 0.481 0 1 0
D2_GenderDiv 3154 0.253 0.435 0 1 0
D3_GenderDiv 3154 0.147 0.355 0 1 0
Panel C: Control variables
Lev 3154 0.215 0.182 0.195 0.906 0
Age (years) 3154 34.284 34.162 20 133 1
Log_Assets 3154 7.390 1.788 7.248 13.517 2.621
Tangibility 3154 0.426 0.408 0.297 1.621 0
Book_to_Mkt 3154 0.587 0.555 0.425 3.17 0.208
σInv 3154 0.051 0.085 0.022 0.575 0
FRQ 3154 0.023 0.030 0.013 0 0.284
Slack 3154 0.096 0.096 0.066 0.579 0.001
Log_Opercycle 3154 3.008 2.258 3.983 6.514 0
Dividend 3154 0.862 0.345 1 1 0
Losses 3154 0.132 0.338 0 1 0
Altman Z 3154 0.956 0.749 0.806 3.787 0.018
BoardInd 3154 0.581 0.148 0.580 0.930 0
BSize 3154 8.681 2.319 8 19 3
Duality 3154 0.018 0.132 0 1 0

Note: This table presents the descriptive statistics of the data showing the mean, standard deviation,
median, maximum, and minimum. The definitions and estimation method of these variables are
summarized in Table 1.

We also test for multicollinearity in the data. As a rule of thumb, a
correlation coefficient higher than 0.70 between the control variables
may indicate a potential multicollinearity problem (Liu et al., 2014). The
correlation coefficients for other independent variables do not exceed
the threshold of 0.70. We also estimate the variance inflation factors
(VIFs) for the empirical models. The untabulated results show that the
VIF for any independent variable does not exceed the critical value of
3.0; hence, we conclude there is no multicollinearity in our data.
5.2.2 | Inferential analysis
(Lower GenderDiv) and higher (Higher GenderDiv) than sample's
median P_GenderDiv. For firms with Low GenderDiv (High Gen-
derDiv), the mean IE is 0.118 (0.092), that is, statistically significant at
1% level. These findings provide some preliminary support to our pri-
mary hypothesis that firms with female directors have lower levels of
IE. Panel C presents the results on the portfolio of firms based on pre-
dictions of CMT. The average IE for firms with All-male boards is
0.126 compared with the lowest average of 0.083 for the portfolio of
firms with three or more female directors (p < 0.01). This provides
some evidence that firms with three or more female directors may
have lowest levels of IE.

This section presents some preliminary results by comparing the

means of IE based on the quality of BGD. Table 4 presents the inde- 5.3 | Main results
pendent sample t-test and Mann–Whitney–Wilcoxon (MWW) test for
the estimates of IE based on the quality of the BGD. Panel A in 5.3.1 | Board gender diversity and IE
Table 4 shows that the average IE_Chen for firms without female
directors (with female directors) is 0.126 (0.097), and the difference is Hypothesis 1 (H1) examines whether BGD mitigates IE. We estimate
statistically significant at the 1% level. In Panel B, we repeat the analy- Equation (4) to examine the impact of BGD on IE, and the results are
sis by analyzing the mean difference of IE based on firms with lower reported in Table 5. Column (1) of Table 5 reports the association
 FAROOQ ET AL.

TABLE 3 The Pearson correlation matrix

Variable (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
(1) IE_Chen 1
(2) IE_Biddle 0.9936 1
(3) D_GenderDiv 0.1045 0.1073 1
(4) P_GenderDiv 0.1103 0.1122 0.7394 1
(5) N_GenderDiv 0.1118 0.1156 0.6922 0.9258 1
(6) D1_GenderDiv 0.0035 0.0014 0.4201 0.15 0.2442 1
(7) D2_GenderDiv 0.0366 0.0398 0.3251 0.389 0.3446 0.4385 1
(8) D3_GenderDiv 0.0758 0.0781 0.2321 0.6136 0.7391 0.3131 0.2422 1
(9) Lev 0.0468 0.0452 0.0636 0.0413 0.063 0.0113 0.0199 0.0367 1
(10) Log_Age 0.1286 0.1234 0.0146 0.0222 0.0244 0.0384 0.0022 0.0371 0.0735 1
(11) Log_Assets 0.0129 0.0233 0.3504 0.3012 0.478 0.0912 0.1476 0.3631 0.1814 0.0197
(12) Tangibility 0.1022 0.094 0.0673 0.0555 0.0662 0.013 0.0847 0.0055 0.1859 0.0738
(13) Book_to_Mkt 0.0789 0.0704 0.127 0.1344 0.1504 0.0103 0.0596 0.0933 0.016 0.0673
(14) σInv 0.1786 0.1739 0.0555 0.0737 0.0757 0.0057 0.0144 0.0765 0.0291 0.0257
(15) FRQ 0.134 0.143 0.0882 0.0796 0.0994 0.0037 0.0333 0.07 0.1624 0.0935
(16) Slack 0.101 0.0996 0.0812 0.0553 0.0912 0.027 0.0712 0.0468 0.2662 0.1644
(17) Log_OperCycle 0.023 0.0153 0.0767 0.0106 0.0522 0.0256 0.0189 0.0341 0.1924 0.0899
(18) Dividend 0.2271 0.2267 0.0895 0.0889 0.1156 0.0273 0.0601 0.0707 0.0261 0.1621
(19) Losses 0.1444 0.1407 0.0385 0.0629 0.0756 0.0407 0.0413 0.0508 0.0684 0.0443
(20) Altman Z 0.2117 0.2067 0.0086 0.0071 0.0683 0.0581 0.0175 0.0677 0.2004 0.025
(21) BoardInd 0.0799 0.0793 0.3362 0.3904 0.3869 0.0281 0.1674 0.2362 0.0442 0.0398
(22) BSize 0.041 0.0478 0.3079 0.1857 0.4706 0.1344 0.1486 0.3695 0.0836 0.009
(23) Duality 0.0017 0.0047 0.066 0.0536 0.059 0.0263 0.001 0.0424 0.0064 0.0348

Note: This table presents the Pearson pairwise correlation matrix. The definitions and estimation method of these variables are summarized in Table 1.

(Continues)
11

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 12

TABLE 3 (Continued)

Variable (11) (12) (13) (14) (15) (16) (17) (18) (19) (20) (21) (22) (23)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11) 1
(12) 0.0713 1
(13) 0.0704 0.0179 1
(14) 0.0303 0.0061 0.055 1
(15) 0.1639 0.1596 0.0981 0.0156 1
(16) 0.2884 0.1234 0.1814 0.0195 0.1206 1
(17) 0.199 0.0394 0.0352 0.0661 0.0264 0.0484 1
(18) 0.1498 0.0836 0.1868 0.0459 0.0125 0.2009 0.1294 1
(19) 0.0729 0.0405 0.2483 0.0133 0.0114 0.0775 0.0563 0.3088 1
(20) 0.3444 0.138 0.2816 0.094 0.1159 0.1091 0.2034 0.0502 0.0923 1
(21) 0.389 0.0236 0.0628 0.0377 0.0864 0.0366 0.0146 0.0668 0.0008 0.0378 1
(22) 0.6581 0.0753 0.0797 0.0268 0.1136 0.1596 0.1905 0.1062 0.0586 0.188 0.1319 1
(23) 0.0869 0.0429 0.0044 0.0135 0.0195 0.0176 0.0217 0.0366 0.0026 0.0265 0.1021 0.0602 1

Note: This table presents the Pearson pairwise correlation matrix. The definitions and estimation method of these variables are summarized in Table 1.
FAROOQ ET AL.

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FAROOQ ET AL. 13

TABLE 4 Inferential analysis of investment inefficiency across portfolios of firms based on levels of board gender diversity

Panel A: Mean investment inefficiency across firms with female directors absent/present

Fem dir absent Fem dir present Diff (%diff) t-test Mann–Whitney z
IE_Chen 0.126 0.097 0.029 4.954*** 4.331***
(23.06%)

Panel B: Mean investment inefficiency across firms with low/high BGD

Low GenderDiv High GenderDiv Diff (%diff) t-test Mann–Whitney z

IE_Chen 0.118 0.092 0.026 5.963*** 5.006***
(22.03%)

Panel C: Pairwise comparison test of mean investment inefficiency based on number of female directors

IE_Chen Diff
All_male 0.126
D1_GenderDiv 0.104 0.022***
D2_GenderDiv 0.095 0.031***
D3_GenderDiv 0.083 0.043***

Note: This table shows the inferential analysis of mean investment inefficiency based on the level of board gender diversity using independent sample t-
test and Mann–Whitney z tests. The definitions and estimation method of these variables are summarized in Table 1.
Abbreviation: BGD, boardroom gender diversity.
***Significance at 1% level.

between presence of female directors (D_GenderDiv) and IE, using
IE_Chen as the dependent variable. After controlling for all firm-spe-
cific, liquidity-specific, and governance-related control variables, the
results suggest that the presence of female directors (D_GenderDiv) is
statistically and negatively associated with IE_Chen at the 10% level
(p < 0.10). This suggests that the inclusion of at least one female
director on corporate boards improves the efficiency of investments.
Column (2) reports the regression analysis using the P_GenderDiv as
independent variable. The results show that the coefficient for P_Gen-
derDiv is negative and statistically significant at the 5% (p < 0.05), indi-
cating that the higher proportion of female directors mitigates
inefficient investments. The coefficient of P_GenderDiv is 0.043,
which indicates that an increase in one unit of P_GenderDiv may
reduce IE by 0.043 points. Economically, a 10% rise in the female
director proportion (P_GenderDiv) reduces IE by 6.32%4 when IE is
measured by the Chen et al. (2011) method.
We now rerun our main model by replacing the IE_Chen with our
second proxy for IE (i.e. IE_Biddle). Columns 4 (for D_GenderDiv), 5 (for
N_GenderDiv), and 6 (for P_GenderDiv) in Table 5 report the results
using IE_Biddle as the dependent variable. The results are the same as
previously reported, that is, N_GenderDiv and P_GenderDiv are statisti-
cally and negatively associated with IE_Biddle at the 5% level.
(p < 0.05). The coefficient of N_GenderDiv (P_GenderDiv) with IE_Biddle
is 0.039 (0.005), that is, close to the coefficient reported with
IE_Chen in earlier analysis.
Overall, these findings suggest that BGD reduces IE and support
our hypothesis (1). The results are in line with the prior literature that
firms with gender diverse boards are better governed (Abbott
et al., 2012; Adams & Ferreira, 2009; Capezio & Mavisakalyan, 2016;
Schwartz-Ziv, 2017). Specifically, our findings provide support to the
argument that female directors, through their stringent monitoring
such as intense scrutiny of managerial investment decisions,
questioning the efficiency of the decisions, and making managers
accountable for poor firm performance, are likely to mitigate ineffi-
cient investment decisions. Our findings further support prior studies
which show firms with gender diverse boards make better investment
decisions, such as having a low intensity of acquisitions (Chen,
Crossland, et al., 2016; Dowling & Aribi, 2013; Levi et al., 2014), make
efficient R&D investment decisions (Chen, Leung, et al., 2018; Chen,
Ni, et al., 2016), and have better efficiency of asset utilization
(Bennouri et al., 2018).
5.3.2 | Endogeneity and self-selection bias
Establishing a causal relationship between BGD diversity and IE may
be challenging because of endogeneity. We acknowledge two major
sources of endogeneity: (i) omitted firm characteristics and (ii) reverse
causality/self-selection bias. It might be possible that there are some
omitted firm characteristics such as CEO risk choices that may be
driving the association between BGD and IE. Entrenched CEOs who
are risk averse with a preference for the “quiet life” may include
female directors who are known to reduce acquisitions. In this case,
the CEO's risk preference may positively affect BGD but negatively
affect investment (Levi et al., 2014). Another challenge is potential
endogeneity bias because of reverse causality between BGD and
IE. Rather than BGD affecting the IE, the opposite may be true. For
example, firms may appoint female directors to their boards because
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14 FAROOQ ET AL.

TABLE 5 Board gender diversity and investment inefficiency

(1) (2) (3) (4) (5) (6)

Variable IE_Chen IE_Chen IE_Chen IE_Biddle IE_Biddle IE_Biddle
D_GenderDiv 0.014* 0.012*
(1.792) (1.769)
P_GenderDiv 0.043** 0.039**
(2.129) (2.113)
N_GednerDiv 0.005** 0.005**
(2.211) (2.285)
Lev 0.024 0.025 0.024 0.021 0.021 0.021
(1.316) (1.343) (1.334) (1.255) (1.283) (1.275)
Log_Age 0.011*** 0.010*** 0.010*** 0.009*** 0.009*** 0.009***
(3.640) (3.593) (3.583) (3.497) (3.445) (3.434)
Log_Assets 0.005 0.005 0.006 0.004 0.004 0.005
(1.277) (1.277) (1.295) (1.187) (1.187) (1.208)
Tangibility 0.024*** 0.024*** 0.023*** 0.020*** 0.020*** 0.020***
(3.418) (3.347) (3.328) (2.955) (2.891) (2.866)
Book_to_Mkt 0.005 0.005 0.005 0.006 0.006 0.006
(0.731) (0.720) (0.732) (0.970) (0.964) (0.985)
σInv 0.195*** 0.194*** 0.194*** 0.168*** 0.167*** 0.167***
(5.395) (5.396) (5.387) (5.497) (5.506) (5.503)
FRQ 0.448*** 0.450*** 0.452*** 0.452*** 0.454*** 0.456***
(2.907) (2.904) (2.912) (3.039) (3.036) (3.043)
Slack 0.024 0.026 0.027 0.018 0.019 0.020
(0.633) (0.665) (0.689) (0.518) (0.551) (0.577)
Log_OperCycle 0.002* 0.002 0.002 0.002* 0.002* 0.002*
(1.733) (1.628) (1.604) (1.875) (1.769) (1.740)
Dividend 0.056*** 0.056*** 0.056*** 0.052*** 0.052*** 0.052***
(5.347) (5.290) (5.279) (5.329) (5.272) (5.258)
Losses 0.022*** 0.022*** 0.022*** 0.020*** 0.019*** 0.019***
(3.213) (3.150) (3.151) (2.969) (2.912) (2.915)
Altman Z 0.027*** 0.027*** 0.027*** 0.026*** 0.027*** 0.027***
(4.745) (4.832) (4.826) (5.045) (5.131) (5.124)
BoardInd 0.049** 0.048** 0.049** 0.043* 0.042* 0.042**
(2.087) (2.085) (2.116) (1.956) (1.954) (1.979)
BSize 0.004** 0.004** 0.004** 0.004** 0.004** 0.003**
(2.222) (2.394) (2.052) (2.211) (2.394) (2.027)
Duality 0.003 0.003 0.002 0.003 0.002 0.002
(0.210) (0.174) (0.159) (0.199) (0.167) (0.152)
Constant Yes Yes Yes Yes Yes Yes
Ind FE Yes Yes Yes Yes Yes Yes
Firm cluster Yes Yes Yes Yes Yes Yes
Year cluster Yes Yes Yes Yes Yes Yes
F 16.3 17.02 14.35 15.72 22.24 15.14
p>F 0.000 0.000 0.000 0.000 0.000 0.000
R2 0.187 0.186 0.186 0.183 0.182 0.182
Obs. 3154 3154 3154 3154 3154 3154

Note: This table shows regression results on the association between board gender diversity and investment inefficiency by estimating our main regression
model using the OLS Petersen (2009) method. t-statistics in parentheses are based on two-dimensional clustered standard errors at firm and year level. The
definitions and estimation method of the variables are summarized in Table 1.
***Significance at 1% level.
**Significance at 5% level.
*Significance at 10% level.

FAROOQ ET AL.
of poor investments. Another potential endogeneity bias may arise
when female directors nonrandomly self-select to serve on firms with
low agency problems. Atif et al. (2019) infer that considering the cur-
rent high demand for female directors around the globe may give
female directors the opportunity to decide on which firms they wish
to serve. The presence of endogeneity could lead to estimating biased,
inconsistent parameters that could confound the findings. We employ
three model specifications to alleviate potential endogeneity prob-
lems. These are the lagged independent variable approach, the instru-
mental variable two-stage least square regressions (IV 2SLS)
approach, and the Heckman (1979) two-stage procedure.
According to the lagged independent variable approach, we
replace the contemporaneous values of BGD and control variables
with 1 year lagged values. Regression analysis using contemporaneous
variables of independent and dependent variables may be prone to
endogeneity bias through reverse causality (Ali et al., 2018); using
lagged independent variables can reduce the effect of reverse causal-
ity (Nadeem, 2020). Table 6 shows that the overall results and regres-
sion coefficients on proxies of BGD remain unchanged. We find that
both proxies of BGD have a statistically negative association with
IE_Chen and IE_Biddle.5 Overall, these results provide very strong evi-
dence that it is the past values of BGD that affect inefficient invest-
ments, rather than past inefficient investments affecting the current
choice of BGD.
The second model employs the IV 2SLS approach. The literature
suggests that IV 2SLS can be an effective technique to deal with omit-
ted variables and reverse causality (Adams & Ferreira, 2009; Levi
et al., 2014; Nadeem et al., 2019; Sila et al., 2016). Using the IV 2SLS
approach, we first extract the exogenous component from the P_Gen-
derDiv using exogenous instrumental variables (IVs). Second, we use
these exogenous estimates to explain the IE. The first IV is the aver-
age percentage of female directors in the firm's industrial sector
excluding the firm's female directors (Liu et al., 2014; Nadeem, 2020).
The rationale behind this instrument is that a firm's gender diversity
composition is expected to be influenced by its industrial peers. The
second IV is motivated based on 2012 UK CGC regulations BGD,
which rose the BGD in the UK considerably. From our sample,
between 2004 and 2011 (2012–2018), the average proportion of
females on the UK boards is 8.2% (18.1%). The difference is statisti-
cally significant using t-test and MWW test. Therefore, our second IV
is an indicator variable that equals “1” from year 2012 to 2018 and
“0” otherwise, that is, consistent with prior studies from the
United Kingdom (Nadeem et al., 2019).
Columns (2) and (4) in Table 7 report the results of the IV 2SLS
regression analysis.6 We find that the coefficients of P_GenderDiv are
negative and statistically significant. More specifically, the coefficients
of P_GenderDiv with IE_Chen and IE_Biddle are 0.214 and 0.207,
statistically significant at 1% (p < 0.01). These findings are consistent
with our baseline regressions results. They confirm that after control-
ling for endogeneity, our findings remain robust.
Finally, we apply the Heckman (1979) two-stage procedure to
resolve any self-selection bias. Based on prior literature, we identify
variables that can determine the appointment of female directors
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15
(e.g., Hillman et al., 2007; Nadeem, 2020; Nadeem et al., 2019; Sila
et al., 2016). These include firm size, leverage, book-to-market ratio,
ROA, board independence, board size, and CEO duality. Next, we esti-
mate the Probit regression with Equation (5) to model the decision to
appoint a female director as follows:
D_GenderDivi,t ¼ α0 þ β1 Log_Assetsi,t þ β2 Levi,t þ β3 Book_to_Mkti,t
þ β4 ROAi,t þ β5 BoardIndi,t þ β6 BSizei,t þ β7 Dualityi,t
þ εi,t
ð5Þ
where D_GenderDiv is a dummy variable equal to “1” if a board of a
particular firm-year observation has female director representation
and “0” otherwise. We then estimate the inverse Mills ratio (IMR)
from the predicted values of Equation (5). Next, in Equation (6), we
include the IMR as an additional control variable. This second-stage
model controls for self-selection bias.
X X
IEi,t ¼ α0 þ β1 GenderDivi,t þ β2 IMRi,t þ γ j Controlj,i,t þ фj Ind þ λYr t
þ εi,t
ð6Þ
The results reported in columns (1) and (3) in Table 7 show that after
controlling for self-selection bias, the presence of female director
reduces the inefficient investments. The coefficient on D_GenderDiv is
negative and statistically significant at 1% level for all IE models. In
addition, the coefficient of IMR for all models in columns (1) and (3) is
statistically significant at the 5% level. This significant association sup-
ports our theoretical arguments that female directors' selection may
be a nonrandom process, and thus, we were right to correct for self-
selection bias.
5.4 | Additional analyses
5.4.1 | The role of regulatory changes
The implementation of UK's FRC 2011 regulations on BGD in the UK
CGC has resulted in the drastic increase in the proportion of female
directors in the UK corporate boards.7 This regulatory shock allows us
to empirically measure the impact of BGD on IE in our sample based
on pre (2005–2011) and post (2012–2018) regulatory reforms period.
To empirically analyze that, we follow Bernardi and Stark (2018) and
perform a difference-in-differences analysis using the regression
Equation (7) below:
IEi,t ¼ α0 þ
X β1 Before  P_GenderDiv
X i,t þ β2 After  P_GenderDivi,t
þ γ j Controlj,i,t þ фj Ind þ εi,t ð7Þ
where Before*P_GenderDiv is the interaction term between Before
(an indicator variable that takes the value of “1” for the period before
the 2011 UK's BGD regulations and 0 otherwise) and P_GenderDiv.
Similarly, After*P_GenderDiv is the interaction term between After
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16 FAROOQ ET AL.

TABLE 6 Board gender diversity and investment inefficiency: Lagged independent variable approach

(1) (2) (3) (4) (5) (6)

Variable IE_Chen IE_Chen IE_Chen IE_Biddle IE_Biddle IE_Biddle
D_GenderDiv t1 0.014** 0.012**
(2.267) (2.186)
P_GenderDiv t1 0.048** 0.043**
(2.185) (2.044)
N_GednerDiv t1 0.005** 0.005**
(2.314) (2.219)
Lev t1 0.035* 0.036** 0.035** 0.035** 0.036** 0.035**
(1.955) (1.989) (1.969) (2.230) (2.265) (2.243)
Log_Age t1 0.009*** 0.009*** 0.009*** 0.008*** 0.007*** 0.007***
(2.964) (2.936) (2.933) (2.822) (2.794) (2.791)
Log_Assets t1 0.004 0.004 0.005 0.003 0.003 0.004
(1.376) (1.380) (1.411) (1.195) (1.193) (1.223)
Tangibility t1 0.015* 0.014 0.014 0.011 0.011 0.010
(1.653) (1.593) (1.560) (1.276) (1.221) (1.190)
Book_to_Mkt t1 0.004 0.004 0.004 0.005 0.005 0.005
(0.679) (0.691) (0.695) (0.971) (0.987) (0.995)
σInv t1 0.135*** 0.134*** 0.134*** 0.122*** 0.121*** 0.121***
(3.253) (3.198) (3.197) (3.249) (3.194) (3.195)
FRQ t1 0.263** 0.262** 0.264** 0.214** 0.214** 0.215**
(2.521) (2.518) (2.529) (2.435) (2.432) (2.442)
Slack t1 0.087** 0.088** 0.089** 0.083** 0.085** 0.085**
(2.050) (2.084) (2.099) (2.184) (2.216) (2.230)
Log_OperCycle t1 0.001 0.001 0.001 0.002 0.001 0.001
(1.083) (0.966) (0.942) (1.287) (1.169) (1.146)
Dividend t1 0.045*** 0.044*** 0.044*** 0.040*** 0.040*** 0.040***
(4.211) (4.143) (4.134) (4.012) (3.954) (3.943)
Losses t1 0.031*** 0.030*** 0.030*** 0.029*** 0.029*** 0.029***
(3.095) (3.098) (3.112) (3.271) (3.273) (3.288)
Altman Z t1 0.023*** 0.023*** 0.023*** 0.022*** 0.022*** 0.022***
(4.888) (5.020) (5.014) (5.154) (5.276) (5.269)
BoardInd t1 0.045** 0.045** 0.046** 0.041** 0.041** 0.042**
(2.380) (2.304) (2.367) (2.308) (2.252) (2.307)
BSize t1 0.003** 0.003** 0.003* 0.003* 0.003** 0.002*
(1.978) (2.198) (1.723) (1.955) (2.186) (1.719)
Duality t1 0.024 0.024 0.025 0.022 0.022 0.022
(1.358) (1.345) (1.360) (1.341) (1.327) (1.342)
Constant Yes Yes Yes Yes Yes Yes
Ind FE Yes Yes Yes Yes Yes Yes
Firm cluster Yes Yes Yes Yes Yes Yes
Year cluster Yes Yes Yes Yes Yes Yes
F 5269.89 19.09 47.42 31.19 16.2 81.12
p>F 0.000 0.000 0.000 0.000 0.000 0.000
R2 0.157 0.157 0.156 0.151 0.151 0.151
Obs. 3154 3154 3154 3154 3154 3154

Note: This table shows the regression results on the association between board gender diversity and investment inefficiency by replacing contemporaneous
values of independent variables with their lagged values (t-1). t-statistics in parentheses are based on two-dimensional clustered standard errors at firm and
year level. The definitions and estimation methods of these variables are summarized in Table 1.
***Significance at 1% level.
**Significance 5% level.
*Significance at 10% level.
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FAROOQ ET AL. 17

TABLE 7 Board gender diversity and investment inefficiency: 2SLS and Heckman estimations

(1) (2) (3) (4)

Variable IE_Chen IE_Chen IE_Biddle IE_Biddle
(Heckman) (2SLS) (Heckman) (2SLS)
D_GenderDiv 0.074*** 0.070***
(2.813) (2.880)
P_GenderDiv (instrumented) 0.214*** 0.207***
(3.508) (3.524)
IMR 0.037** 0.035**
(2.394) (2.483)
Lev 0.021 0.036* 0.018 0.031*
(1.634) (1.945) (1.493) (1.875)
Log_Age 0.010*** 0.010*** 0.009*** 0.009***
(4.615) (3.373) (4.291) (3.114)
Log_Assets 0.007*** 0.007* 0.006*** 0.006*
(3.360) (1.868) (3.095) (1.687)
Tangibility 0.024*** 0.019** 0.020*** 0.015**
(3.676) (2.555) (3.375) (2.202)
Book_to_Mkt 0.013*** 0.007 0.014*** 0.009
(2.684) (1.206) (3.006) (1.523)
σInv 0.200*** 0.204*** 0.173*** 0.179***
(8.036) (5.576) (7.512) (5.437)
FRQ 0.428*** 0.488*** 0.433*** 0.484***
(5.747) (2.995) (6.274) (3.123)
Slack 0.018 0.049 0.013 0.040
(0.755) (1.511) (0.586) (1.320)
Log_OperCycle 0.002 0.001 0.002 0.001
(1.455) (0.902) (1.598) (0.662)
Dividend 0.059*** 0.061*** 0.055*** 0.056***
(8.881) (4.803) (8.928) (4.764)
Losses 0.021*** 0.027*** 0.019*** 0.024***
(3.259) (2.783) (3.103) (2.686)
Altman Z 0.028*** 0.030*** 0.027*** 0.029***
(8.054) (5.196) (8.552) (5.453)
BoardInd 0.017 0.011 0.013 0.003
(0.620) (0.412) (0.506) (0.139)
BSize 0.002 0.004* 0.002 0.003*
(1.602) (1.939) (1.508) (1.907)
Duality 0.009 0.005 0.008 0.003
(0.549) (0.358) (0.538) (0.217)
Constant Yes Yes Yes Yes
Ind FE Yes Yes Yes Yes
Firm cluster Yes Yes Yes Yes
Year FE Yes No Yes No
2
Partial R (instruments) 0.188 0.188
F-stat (instruments) 178.755 178.755
R2 0.354 0.354
Obs. 3104 3154 3104 3154

Note: This table reports the results of the 2SLS and Heckman estimations. See the main text for instrumental variables information. t-statistics in parentheses are
based on two-dimensional clustered standard errors at firm and year level. The definition and estimation method of these variables is summarized in Table 1.
***Significance at 1% level.
**Significance at 5% level.
*Significance at 10% level.
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18 FAROOQ ET AL.

(an indicator variable that takes the value of “1” for the period after T A B L E 8 Regulatory analysis of the 2011 UK CGC regulations
the 2011 UK's BGD regulations and 0 otherwise) and P_GenderDiv. (difference-in-differences approach)

This regression model allows us to measure the effects of BGD before (1) (2)
and after the BGD regulations in the United Kingdom. More specifi- Variable IE_Chen IE_Biddle

cally, β1 measures the association between BGD and IE before the Before * P_GenderDiv 0.022 0.026
implementation of UK's BGD regulations, whereas β2 captures the (1.037) (1.214)
association between BGD and IE after the implementation of UK's After * P_GenderDiv 0.044** 0.040**
BGD regulations. The results presented in columns (1) and (2) of (2.159) (2.101)
Table 8 show that the coefficient of Before*P_GenderDiv is statistically Lev 0.025 0.021
insignificant, suggesting that the BGD does not have any significant (1.366) (1.300)
impact in reducing IE, prior to the implementation of BGD regulations. Log_Age 0.010*** 0.009***
However, the coefficient of After*P_GenderDiv is negative and statisti- (3.563) (3.421)
cally significant at 5% level, indicating the significant association of
Log_Assets 0.005 0.004
BGD with IE, after the BGD regulations.8 These results can be inter-
(1.249) (1.168)
preted as further evidence that the increase in proportion of BGD
Tangibility 0.024*** 0.020***
after the regulations is significantly associated with a reduction in IE.
(3.346) (2.889)
Book_to_Mkt 0.005 0.006
(0.748) (0.979)
5.4.2 | Channel analysis
σInv 0.194*** 0.167***
(5.354) (5.466)
In this section, we test the underlying mechanisms through which
FRQ 0.446*** 0.451***
female directors may reduce IE. We argued in the hypothesis
section that female directors might mitigate IE through the board's (2.900) (3.046)

governance dynamics. As argued earlier, female directors actively take Slack 0.025 0.018

part in governance roles and steer a firm's direction (Schwartz- (0.642) (0.534)

Ziv, 2017). Furthermore, female board members demonstrate active Log_OperCycle 0.002 0.002*

participation in boards monitoring through their higher board meeting (1.639) (1.772)
attendance records and involvement in governance subcommittees Dividend 0.056*** 0.052***
(Adams & Ferreira, 2009; Nadeem, 2021a). A higher board meeting (5.312) (5.289)
attendance may enable female directors to effectively monitor man- Losses 0.022*** 0.019***
agers, such as seeking further information or providing advice and (3.136) (2.905)
guidance to managers. Thus, we expect that female directors may Altman Z 0.028*** 0.027***
reduce IE through improving the board dynamics. Following (4.836) (5.133)
Nadeem (2021a), we observe board dynamics through two measures, BoardInd 0.047** 0.041*
namely, the board meeting attendance and female participation in (1.980) (1.879)
subcommittees. Regarding the first measure, we interact BGD with
BSize 0.005** 0.004**
average attendance (B_M_Att) of the board members in board meet-
(2.418) (2.414)
ings. The results reported in columns (1) and (6) of Table 9 show that
Duality 0.003 0.003
the coefficient on interaction term P_GenderDiv*B_M_Att is statisti-
(0.194) (0.179)
cally insignificant. These findings suggest that board meeting atten-
Constant Yes Yes
dance may not be the channel through which BGD reduces IE. These
Ind FE Yes Yes
findings are similar to Nadeem (2021a), who documents that board
Firm cluster Yes Yes
activity may not be the mechanism through which BGD impacts firm
Year cluster Yes Yes
outcomes.
F 26.40 29.21
Regarding the second measure, board dynamics such as active
involvement in governance subcommittees may enable female direc- p>F 0.000 0.000

tors to perform narrower governance tasks such as those related to R2 0.187 0.182

audit and remuneration (Chapple & Humphrey, 2014) and to provide Obs. 3154 3154

recommendations and information to the board for vital strategic
decision-making. The audit committee is responsible for monitoring
auditing tasks such as appointment of independent auditors with
financial expertise and ensuring the integrity of firms internal audits
and quality of its disclosures (Barako et al., 2006; Green &
Homroy, 2018). Since a well-functioning audit committee is meant to
Note: This table reports the results of the difference-in-differences estimation
using the UK CGC as an exogenous shock. t-statistics in parentheses are based
on two-dimensional clustered standard errors at firm and year level. The
definition and estimation method of these variables is summarized in Table 1.
***Significance at 1% level.
**Significance at 5% level.
*Significance at 10% level.
 TABLE 9 Channel analysis

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
Variable IE_Chen IE_Chen IE_Chen IE_Chen IE_Chen IE_Biddle IE_Biddle IE_Biddle IE_Biddle IE_Biddle
FAROOQ ET AL.

P_GenderDiv 0.409 0.009 2.145** 0.336 0.006 2.060**

(1.052) (0.203) (2.174) (0.930) (0.150) (2.207)
B_M_Att 0.000 0.000
(0.402) (0.436)
P_GenderDiv * B_M_Att 0.005 0.004
(1.115) (0.991)
Fem_Audit_Com 0.007** 0.006**
(2.110) (1.996)
Fem_Comp_Com 0.011** 0.014**
(2.514) (2.474)
Log_CEO_Options 0.003 0.002
(0.653) (0.433)
P_GenderDiv * Log_CEO_Options 0.025* 0.025*
(1.779) (1.844)
FRQ * P_GenderDiv 2.151** 2.068**
(2.146) (2.182)
FRQ 0.737*** 0.729***
(3.026) (3.116)
Lev 0.026 0.016 0.029 0.005 0.025 0.021 0.012 0.024 0.013 0.022
(1.202) (1.239) (1.318) (0.220) (1.355) (1.076) (1.145) (1.214) (0.650) (1.297)
Log_Age 0.008*** 0.017*** 0.018*** 0.008** 0.010*** 0.007** 0.019*** 0.007*** 0.006* 0.009***
(2.641) (3.326) (3.780) (1.962) (3.520) (2.523) (3.115) (2.645) (1.730) (3.374)
Log_Assets 0.009** 0.006 0.006 0.017*** 0.005 0.008** 0.005 0.004 0.015*** 0.004
(2.326) (1.325) (1.401) (4.113) (1.201) (2.248) (1.243) (1.195) (4.077) (1.101)
Tangibility 0.019** 0.033*** 0.019*** 0.024** 0.023*** 0.016** 0.029*** 0.019*** 0.019** 0.020***
(2.242) (3.491) (3.258) (2.448) (3.355) (2.000) (2.994) (2.728) (2.129) (2.888)
Book_to_Mkt 0.005 0.006 0.008 0.014** 0.004 0.005 0.006 0.008 0.012** 0.005
(0.681) (0.721) (1.036) (2.036) (0.703) (0.763) (0.863) (1.170) (1.978) (0.948)
σInv 0.191*** 0.184*** 0.189*** 0.228*** 0.195*** 0.164*** 0.159*** 0.164*** 0.198*** 0.168***
(4.346) (4.838) (5.177) (3.661) (5.462) (4.287) (4.940) (5.316) (3.507) (5.591)
Slack 0.022 0.028 0.022 0.018 0.026 0.016 0.022 0.017 0.021 0.020
(0.736) (0.851) (0.687) (0.411) (0.683) (0.593) (0.735) (0.580) (0.540) (0.571)

(Continues)
19

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 20

TABLE 9 (Continued)

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
Variable IE_Chen IE_Chen IE_Chen IE_Chen IE_Chen IE_Biddle IE_Biddle IE_Biddle IE_Biddle IE_Biddle
Log_OperCycle 0.002* 0.001 0.001 0.003 0.002* 0.002** 0.001 0.001 0.003 0.002*
(1.777) (1.022) (0.930) (1.436) (1.654) (1.963) (1.174) (1.072) (1.395) (1.797)
Dividend 0.055*** 0.051*** 0.053*** 0.049*** 0.057*** 0.051*** 0.047*** 0.049*** 0.045*** 0.052***
(5.545) (5.029) (5.413) (4.035) (5.375) (5.488) (5.037) (5.372) (4.076) (5.364)
Losses 0.017* 0.018** 0.021*** 0.010 0.022*** 0.014* 0.016** 0.018** 0.006 0.019***
(1.953) (2.373) (2.645) (0.765) (3.144) (1.739) (2.184) (2.427) (0.551) (2.905)
Altman Z 0.026*** 0.042*** 0.032*** 0.023*** 0.027*** 0.025*** 0.031*** 0.031*** 0.022*** 0.026***
(6.000) (5.777) (5.833) (5.299) (4.868) (6.276) (5.936) (5.975) (5.474) (5.175)
BoardInd 0.050** 0.061*** 0.078*** 0.044 0.045* 0.043** 0.057*** 0.070*** 0.036 0.039*
(2.395) (2.925) (3.687) (1.397) (1.913) (2.279) (2.983) (3.645) (1.276) (1.776)
BSize 0.006*** 0.005** 0.004** 0.008*** 0.004** 0.005*** 0.004** 0.003* 0.007*** 0.004**
(3.067) (2.222) (1.987) (4.014) (2.302) (3.022) (2.159) (1.925) (4.138) (2.286)
Duality 0.001 0.003 0.004 0.042*** 0.003 0.001 0.004 0.005 0.039*** 0.003
(0.062) (0.241) (0.338) (2.744) (0.223) (0.064) (0.293) (0.376) (2.757) (0.213)
Constant Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Ind FE Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Firm cluster Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Year cluster Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
F 39.40 28.69 1766.93 6.51 10.73 15.68 22.10 66.68 6.61 12.18
p>F 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
R2 (Pseudo R-Sqr) 0.186 (0.171) (0.106) 0.240 0.190 0.180 (0.165) (0.140) 0.231 0.186
Obs. 2535 2849 2845 1159 3154 2535 2849 2845 1159 3154

Note: This table shows regression results of the channel analysis. The channels tested are board dynamics, stewardship effects, and financial reporting quality. t-statistics in parentheses are based on two-
dimensional clustered standard errors at firm and year level. The details of the measures of channels are presented in the main text. The definition and estimation method of the variables is summarized in
Table 1.
***Significance at 1% level.
**Significance at 5% level.
*Significance at 10%.
FAROOQ ET AL.

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FAROOQ ET AL.
increase governance, we expect that BGD should reduce IE by female
participation on the audit committees. Thus, we measure female rep-
resentation on the audit committees through an indicator variable
(Fem_Audit_Com) that takes the value of “1” if there is at least one
female director on the audit committee, “0” otherwise. We then run
our main model by replacing the main independent variable with
Fem_Audit_Com and report results in Columns (2) and (7) of Table 9.
The coefficient on Fem_Audit_Com is negative and statistically signifi-
cant. These results provide evidence that female directors may reduce
IE through good governance of the audit committee. This finding is
generally consistent with prior studies (e.g., Nadeem, 2021a) that
argue that female directors improve the functioning of the audit com-
mittee, which in turn has positive implications for corporate
outcomes.
The compensation committee performs tasks such as setting the
compensation and benefits for firm's CEOs and senior executives.
CEOs can expropriate excess compensation and perquisites through
increasing size of the firms by taking poor investment decisions (Lei
et al., 2014; Shleifer & Vishny, 1989). Nadeem (2021a) argues that
female directors influence CEO compensation through their monitor-
ing roles, asking more questions and reducing excessive CEO compen-
sation. Thus, we expect that female directors might influence IE
through their participation in the compensation committees. Thus, we
measure female participation in the compensation committee through
an indicator variable (Fem_Comp_Com) that takes the value of “1” if
there is at least one female director on the compensation committee,
“0” otherwise. We then run our main model by replacing the main
independent variable with Fem_Comp_Com and report results in col-
umns (3) and (8) in Table 9. Overall, the coefficient on Fem_Comp_Com
is negative and statistically significant at 5% level, suggesting that
BGD affects IE through their participation in the compensation
committee.
Our second proposed channel was that female directors are
more likely to mitigate agency conflicts through creating steward-
ship effect on CEOs. One way of creating the stewardship effect is
through aligning the CEOs' interests with that of shareholders by
linking CEOs compensation with firm performance (Adams &
Ferreira, 2009; Nadeem, 2021a) or penalizing poorly performing
CEOs (Schwartz-Ziv, 2017). A higher performance-linked compensa-
tion such as option awards could align managers and shareholders'
interests and prevent CEOs to pursue their own interests
(Williams & Rao, 2006). The empirical evidence shows that option-
based compensation improves corporate investment efficiency
(Henry, 2010). Thus, we expect that firms with female directors on
boards are more likely to mitigate suboptimal investment behavior
of CEOs by awarding higher levels of options. We analyze this
association by taking the natural log of CEO option awards
(Log_CEO_Options) and interact it with P_GenderDiv. Results reported
in columns (4) and (9) of Table 9 show that the coefficient on the
interaction term (P_GenderDiv*Log_CEO_Options) is negative and sta-
tistically significant. These results are consistent with our argument
concerning stewardship effects that female directors may mitigate
IE by increasing the option awards to CEOs.
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21
Our third and final proposed channel was that the firms with
female directors are more likely to mitigate IE by curbing information
asymmetry. A better information environment offers external market
participants the availability (unavailability) of valuable (invaluable)
investments, which can raise market confidence and ultimately ease
(restrict) supply of capital, limiting inefficient investments (Lai
et al., 2014). The trustworthy disclosure of a firm's accounting figures
benefits stakeholders by providing them with transparent information
concerning firm performance. Prior studies provide clear evidence
that the firms' FRQ is positively associated with investment efficiency
(Chen et al., 2011). Prior studies also document that BGD significantly
improves the FRQ of firms (Gul et al., 2013; Nadeem, 2021a). Taken
together, we argue that BGD may affect IE through the FRQ mecha-
nism. We therefore interact the measure of FRQ with P_GenderDiv
and report results in columns (5) and (10) of Table 9. We find that
both P_GenderDiv and FRQ are negatively associated with IE, indicat-
ing that BGD and FRQ improve investment efficiency. However, we
find the coefficient of interaction effect (FRQ*P_GenderDiv) is positive
and statistically significant, indicating that the positive impact of
female directors on IE is limited only to firms with poor FRQ per se. In
other words, this finding suggests that the governance role of female
directors in mitigating IE is more useful when firms have poor infor-
mation environment, that is, these firms are more prone to moral haz-
ard and ethical dilemmas (Enache & Hussainey, 2020; Ferreira
et al., 2011; Nadeem, 2021b). We further confirm this argument by
splitting our sample into two subsamples: high FRQ (a binary variable
that equals “1” if the value of FRQ is above the sample median, “0”
otherwise) and low FRQ (a binary variable that equals “1” if the value
of FRQ is below the sample median, 0 otherwise) and rerun our main
model. Our results in the appendix show that BGD is significantly
associated with IE in low FRQ firms, indicating that female directors
play their strong monitoring role in firms with poor FRQ.
5.5 | CMT perspective
The UK CGC's disclosure-based guidelines can potentially lead to a
tick-box compliance culture where firms make female board appoint-
ments purely as tokens. Tokens are mere representation of a group
and are denied active roles in group decision-making (Kanter, 1977).
Their heterogeneous opinions are less likely to be heard, expressed, or
taken seriously (Joecks et al., 2013). This is because board proceed-
ings in male-dominated boards are controlled by males (Strydom
et al., 2017) who may already have a prior understanding and resolve
issues outside board meetings (Konrad et al., 2008). Female token
board members are not made to feel valuable members of the group
but are perceived with stereotypical gender-specific roles
(Kanter, 1977), instead of possessing any leadership qualities (Lee &
James, 2007). This builds performance pressure on them (Torchia
et al., 2011) further hampering their participation and performance in
corporate decision-making.
The CMT predicts that a minority group member will bring
desired benefits of their skills and abilities if their representation
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22 FAROOQ ET AL.

TABLE 10 Board gender diversity and investment inefficiency: A critical mass perspective

(1) (2) (3) (4) (5) (6)

Variable IE_Chen IE_Chen IE_Chen IE_Biddle IE_Biddle IE_Biddle
D1_GenderDiv 0.013 0.011
(1.575) (1.518)
D2_GenderDiv 0.015* 0.014*
(1.891) (1.947)
D3_GenderDiv 0.019** 0.017**
(1.999) (2.043)
Prop_35%_To_65% 0.009** 0.015* 0.009** 0.014*
(2.142) (1.953) (2.171) (1.949)
Prop_25%_To_65%_Or_65%_To_75% 0.011 0.009
(1.369) (1.302)
Lev 0.025 0.025 0.025 0.021 0.022 0.021
(1.340) (1.372) (1.342) (1.284) (1.315) (1.288)
Log_Age 0.010*** 0.010*** 0.010*** 0.009*** 0.009*** 0.009***
(3.604) (3.591) (3.626) (3.456) (3.444) (3.480)
Log_Assets 0.006 0.005 0.006 0.005 0.004 0.005
(1.320) (1.259) (1.296) (1.232) (1.171) (1.209)
Tangibility 0.024*** 0.023*** 0.024*** 0.020*** 0.020*** 0.020***
(3.392) (3.296) (3.341) (2.931) (2.834) (2.871)
Book_to_Mkt 0.005 0.005 0.005 0.006 0.006 0.006
(0.776) (0.709) (0.764) (1.024) (0.955) (1.005)
σInv 0.195*** 0.194*** 0.195*** 0.168*** 0.167*** 0.168***
(5.355) (5.419) (5.410) (5.471) (5.544) (5.522)
FRQ 0.448*** 0.450*** 0.447*** 0.452*** 0.453*** 0.451***
(2.899) (2.910) (2.907) (3.031) (3.042) (3.040)
Slack 0.025 0.025 0.024 0.018 0.018 0.017
(0.642) (0.642) (0.628) (0.527) (0.525) (0.512)
Log_OperCycle 0.002* 0.002 0.002 0.002* 0.002* 0.002*
(1.668) (1.590) (1.640) (1.798) (1.722) (1.766)
Dividend 0.056*** 0.056*** 0.056*** 0.052*** 0.052*** 0.052***
(5.315) (5.305) (5.334) (5.291) (5.284) (5.313)
Losses 0.022*** 0.022*** 0.022*** 0.019*** 0.019*** 0.019***
(3.247) (3.129) (3.213) (2.999) (2.895) (2.969)
Altman Z 0.027*** 0.027*** 0.027*** 0.027*** 0.027*** 0.027***
(4.755) (4.858) (4.753) (5.061) (5.159) (5.061)
BoardInd 0.046** 0.050** 0.047** 0.040* 0.044** 0.041*
(1.987) (2.144) (1.989) (1.847) (1.996) (1.851)
BSize 0.004** 0.005** 0.004** 0.003** 0.004** 0.004**
(2.112) (2.432) (2.246) (2.085) (2.436) (2.239)
Duality 0.003 0.003 0.003 0.003 0.003 0.003
(0.193) (0.197) (0.213) (0.178) (0.189) (0.203)
Constant Yes Yes Yes Yes Yes Yes
Ind FE Yes Yes Yes Yes Yes Yes
Firm cluster Yes Yes Yes Yes Yes Yes
Year cluster Yes Yes Yes Yes Yes Yes
F 18.16 13.41 14.67 16.35 13.06 14.55
p>F 0.000 0.000 0.000 0.000 0.000 0.000

FAROOQ ET AL.
TABLE 10 (Continued)
(1) (2)
Variable IE_Chen IE_Chen
R2 0.187 0.186
Obs. 3154 3154
Note: This table reports results of the critical mass perspective. t-statistics in parentheses are based on two-dimensional clustered standard errors at firm
and year level. The definition and estimation method of these variables is summarized in Table 1.
***Significance at 1% level.
**Significance at 5% level.
*Significance at 10%.
meets a certain threshold. As their representation rises, the group
begins to accept them and no longer perceives them as outsiders
(Kramer et al., 2007). They are heard and taken seriously during board
meetings (Joecks et al., 2013; Strydom et al., 2017); thus, they begin
voicing their opinions and disagree on critical issues (Terjesen
et al., 2009; Torchia et al., 2011) effectively benefitting boards
with their robust monitoring. A study by Konrad et al. (2008) calls
three a “magic number.” They find that board dynamics change radi-
cally when a board consists of three female directors. They find that
boards became more professional and interactive and conducted
intense board discussions if there were three or more female direc-
tors. Kristie (2011) (p. 22) posits, “one is a token, two is a presence, and
three is a voice.” Therefore, we expect that the negative relationship
between BGD and IE will be stronger in firms with three of more
female directors on boards. To analyze this phenomenon, we estimate
the following equation.
IEi,t ¼ α0X
þ α1 D1_GenderDiv Xi,t þ α2 D2_GenderDivi,t þ α3 D3_GenderDivi,t
þ γ j Controlj,i,t þ фj Ind þ εi,t
ð8Þ
where D1_GenderDiv, D2_GenderDiv & D3_GenderDiv are dummy vari-
ables that are equal to “1” and “0” otherwise, if the number of female
directors on the board is “1”, “2,” and “3” or more, respectively. The
results are reported in Table 10. Column (1) in Table 10 shows that
the coefficients of D2_GenderDiv and D3_GenderDiv are 0.015 and
0.019, respectively, and are statistically significant at 10% and 5%,
respectively. The coefficient on D1_GenderDiv is statistically insignifi-
cant. These results clearly suggest that the inclusion of a single female
director may be indicative of tokenism and that they do not have any
influence on board's monitoring or decision-making process. However,
as predicted by CMT, the influence of female directors in mitigating IE
rises with the rise in the representation of female directors. The asso-
ciation between D3_GenderDiv and IE_Chen is most pronounced
suggesting that firms with three or more female directors have the
most pronounced impact in mitigating opportunistic investment deci-
sions. In Table 10, column (4), where IEs are estimated by the Biddle
et al. (2009) method, we observe similar results. The coefficient of
D3_GenderDiv is still negative and strongest (β3 = 0.017, p < 0.05)
compared with the coefficient of D2_GenderDiv (β2 = 0.014,
p < 0.10) and the coefficient on D1_GenderDiv is insignificant.
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23
(3) (4) (5) (6)
IE_Chen IE_Biddle IE_Biddle IE_Biddle
0.187 0.183 0.182 0.183
3154 3154 3154 3154
A potential concern of using this proxy to test critical mass is that
we may be measuring the effect of firms with large boards. Large
boards may automatically have a higher number of female directors
and may not be balanced. To mitigate this concern, we also construct
a proxy, which is not sensitive to board size. We follow Schwartz-
Ziv (2017) and construct an alternative proxy of critical mass with a
dummy variable where P_GenderDiv is between 35% and 65%
(Prop_35%_To_65%). Schwartz-Ziv (2017) argues that a gender-
balanced board should comprise of at least 35% female representation
but not exceed 65%. Findings in columns (2) and (5) in Table 10 show
that firms with 35%–65% female representation have lower IE
(p < 0.05). In columns (3) and (6), we check the robustness of our
results by including another dummy variable that takes the value of
“1” if a board has between 25%–65% and 65%–75% female directors'
proportion (Prop_25%_To_65%_Or_65%_To_75%). The coefficient on
Prop_35%_To_65% remains negative and statistically significant.
Overall, our results stay robust and support the critical mass
perspective.
5.6 | Robustness analysis
We extend the empirical analysis and run three additional robustness
checks. These include using alternative proxies for IE, BGD, and
correcting for possible biases association with a two-step investment
estimation method.
5.6.1 | Alternative proxy of IE
In order to check the robustness of our results with respect to IE, we
follow Richardson's (2006) investment expenditure model and esti-
mate another proxy of IE. Richardson (2006) argues that firms spend a
considerable portion of their total investments on maintaining existing
PPE and other operating assets. Therefore, new investments (INEW)
undertaken by a firm are the difference between total investments
(ITOTAL) and the investment required to maintain existing assets mea-
sured by depreciation and amortization expenses (IDEPRECIATION). Fol-
lowing Richardson (2006), we first compute new investments (INEW)
and then adopt his model to estimate expected investment by
regressing new investments (INEW) on proxies of growth opportunity,
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24 FAROOQ ET AL.

TABLE 11 Robustness analysis

(1) (2) (3) (4) (5) (6) (7)

Variable IE_Richardson IE_Richardson IE_Richardson IE_Chen IE_Biddle IE_Chen IE_Chen
D_GenderDiv 0.010*
(1.831)
P_GenderDiv 0.030* 0.046**
(1.685) (1.993)
N_GenderDiv 0.004**
(2.185)
Blau_Index 0.036** 0.033**
(2.035) (2.039)
D1_GenderDiv 0.010
(1.621)
D2_GenderDiv 0.016**
(2.043)
D3_GenderDiv 0.019**
(2.020)
Lev 0.014 0.014 0.014 0.025 0.021 0.018 0.018
(1.205) (1.176) (1.183) (1.346) (1.287) (0.917) (0.920)
Log_Age 0.007*** 0.006*** 0.006*** 0.010*** 0.009*** 0.007*** 0.007***
(3.304) (3.273) (3.266) (3.589) (3.441) (2.649) (2.642)
Log_Assets 0.000 0.000 0.001 0.006 0.005 0.006 0.006
(0.190) (0.174) (0.246) (1.291) (1.203) (1.593) (1.628)
Tangibility 0.006 0.006 0.007 0.024*** 0.020*** 0.015** 0.016**
(0.750) (0.791) (0.822) (3.357) (2.900) (2.372) (2.473)
Book_to_Mkt 0.015*** 0.014*** 0.015*** 0.005 0.006 0.003 0.003
(3.331) (3.250) (3.311) (0.746) (0.991) (0.560) (0.611)
σInv 0.068*** 0.067*** 0.067*** 0.195*** 0.168*** 0.102*** 0.102***
(2.625) (2.597) (2.576) (5.406) (5.513) (3.202) (3.223)
FRQ 0.509*** 0.511*** 0.512*** 0.449*** 0.453*** 0.446*** 0.445***
(4.401) (4.399) (4.406) (2.906) (3.038) (2.891) (2.888)
Slack 0.006 0.007 0.008 0.025 0.019 0.032 0.031
(0.267) (0.309) (0.345) (0.657) (0.542) (0.986) (0.953)
Log_OperCycle 0.001 0.001 0.001 0.002 0.002* 0.002* 0.002*
(1.119) (1.043) (1.004) (1.624) (1.763) (1.873) (1.900)
Dividend 0.029*** 0.029*** 0.029*** 0.056*** 0.052*** 0.053*** 0.053***
(2.806) (2.768) (2.762) (5.298) (5.280) (5.874) (5.892)
Losses 0.002 0.001 0.001 0.022*** 0.019*** 0.026*** 0.027***
(0.331) (0.260) (0.271) (3.169) (2.931) (3.881) (3.948)
Altman Z 0.018*** 0.019*** 0.019*** 0.027*** 0.027*** 0.028*** 0.028***
(5.277) (5.446) (5.437) (4.811) (5.109) (5.618) (5.558)
BoardInd 0.021 0.021 0.020 0.047** 0.041* 0.030 0.028
(1.546) (1.607) (1.544) (1.994) (1.860) (1.360) (1.271)
BSize 0.001 0.000 0.001 0.004** 0.004** 0.004** 0.003**
(0.460) (0.240) (0.725) (2.359) (2.358) (2.537) (2.160)
Duality 0.009 0.008 0.008 0.003 0.002 0.001 0.001
(0.511) (0.488) (0.478) (0.177) (0.169) (0.102) (0.098)
First-step Regressors - - - - - Yes Yes
Constant Yes Yes Yes Yes Yes Yes Yes
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FAROOQ ET AL. 25

TABLE 11 (Continued)

(1) (2) (3) (4) (5) (6) (7)

Variable IE_Richardson IE_Richardson IE_Richardson IE_Chen IE_Biddle IE_Chen IE_Chen
Ind FE Yes Yes Yes Yes Yes Yes Yes
Firm cluster Yes Yes Yes Yes Yes Yes Yes
Year cluster Yes Yes Yes Yes Yes Yes Yes
F 24.36 638.61 33.58 43.72 18.54 18.48 16.7
p>F 0.000 0.000 0.000 0.000 0.000 0.000 0.000
R2 0.137 0.137 0.137 0.187 0.182 0.290 0.291
Obs. 3154 3154 3154 3154 3154 3154 3154

Note: This table reports results of the robustness check by employing alternative proxies for independent & dependent variables and controlling for
potential bias with a two-step investment estimation method. t-statistics in parentheses are based on two-dimensional clustered standard errors at firm
and year level. The definition and estimation method of these variables is summarized in Table 1.
***Significance at 1% level.
**Significance at 5% level.
*Significance at 10%.

firm level determinants of investment and industrial and yearly variety and balance. Variety measures whether the board has repre-
dummies as shown below in Equation (9): sentation from both genders and balance captures how equally both
genders are represented on the board (Abad et al., 2017; Campbell &
INEW,i,t ¼ β0 þ β1 Book_to_Mkti,t1 þ β2 Levi,t1 þ β3 Slacki,t1 Mínguez-Vera, 2008). Following Abad et al. (2017) and Nadeem
þ β4 LogAgei,t1 þ β5 LogAsseti,t1 þ β7 StockReturnst1
(2020), we estimate the Blau_Index as shown in Equation (10).
þ β8 INEW i,t1 þ фIndi þ λYr þ εi,t ð9Þ
Xn
Blau_Index ¼ 1  P2
i¼1 i
ð10Þ

where INEW is the difference between total investments (ITOTAL) and

depreciation and amortization expenses (IDEPRECIATION). All variables
are scaled by lagged total assets in t-1. Book_to_Mkt is the ratio of BV
of total common shareholder equity to its market value; Lev repre-
sents the total LT and ST debt divided by sum of BV of debt and
equity; Slack is the sum of cash and ST investments scaled by lagged
total assets; LogAge is the natural log of number of years since firm
was first incorporated; LogAsset is the natural log of total assets;
StockReturns represents the change in market capitalisation of the
firms from year t-2 to t-1; and фInd and λYr control for industry fixed
effects and year fixed effects, respectively. Like previous investment
models, the residuals from Equation (9) represent the deviation of
investments from their expected level. We use absolute values of
these residuals to proxy for IE by multiplying negative residuals by
“1” and labeling it (IE_Richardson i,t = jϵ i,tj).
Results reported in columns (1) to (3) of Table 11 show that the
association between BGD and IE is not affected by the use of
IE_Richardson as the dependent variable. For example, the finding in
column (3) shows the impact of N_GenderDiv is negative and statisti-
cally significant (coefficient = 0.004, p < 0.05), suggesting that BGD
mitigates IE. Nonetheless, these findings suggest that our results are
robust to an alternative proxy of IE.9
5.6.2 | Alternative proxy of BGD
We construct a composite index of board heterogeneity based on
Blau (1977). This measures “diversity” along two dimensions of
where Pi is the percentage of each group in each category i. The blau
index value ranges from “0” to “0.5,” representing a fully homoge-
neous board with equal representation of both genders, to a fully het-
erogeneous board, respectively.
The results are reported in columns (4) and (5) of Table 11. It
shows that the coefficients on Blau_Index are 0.036 with IE_Chen
and 0.033 with IE_Biddle and both are statistically significant at 5%
level (p < 0.05). Thus, our results remain robust when applying an
additional proxy of BGD.
5.6.3 | Correcting possible biases associated with
the two-step method
Chen, Leung, et al. (2018) suggest that using two-stage methods such
as estimating IE in the first-stage and then employing these estimates
in the second-stage as the dependent variable can lead to estimating
biased coefficients and standard errors. Through simulations, Chen,
Leung, et al. (2018) show that if the control variables in the second-
step regression are correlated with the first-step regressors, then
exclusion of the first-step regressors from second-stage can lead to
biased estimates. Chen, Leung, et al. (2018) (p. 33) suggest correcting
for this bias by including the first-step regressors in the second-stage
regressions. We follow their method and include all the regressors
from the first-stage models of IE in the second-stage regressions.
Columns (6) and (7) in Table 11 provide additional support for our
baseline findings. We observe slightly different values of coefficients;
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26 FAROOQ ET AL.

TABLE 12 Board gender diversity and overinvestment and underinvestment

(1) (2) (3) (4)

Variable OI_Chen UI_Chen OI_Biddle UI_Biddle
P_GenderDiv 0.070* 0.044** 0.070* 0.039*
(1.658) (2.133) (1.876) (1.797)
Lev 0.024 0.014 0.032 0.012
(0.848) (0.839) (1.268) (0.738)
Log_Age 0.020*** 0.000 0.017*** 0.001
(4.243) (0.111) (4.068) (0.227)
Log_Assets 0.008** 0.006** 0.006 0.006**
(2.093) (2.159) (1.552) (2.196)
Tangibility 0.022** 0.019*** 0.018* 0.015***
(1.973) (4.562) (1.818) (3.844)
Book_to_Mkt 0.001 0.008** 0.008 0.008**
(0.128) (2.201) (0.773) (2.129)
σInv 0.203*** 0.010 0.175*** 0.014
(4.947) (0.200) (4.725) (0.290)
FRQ 1.071**** 0.025 1.077*** 0.026
(7.301) (0.272) (8.147) (0.320)
Slack 0.033 0.052* 0.011 0.053*
(0.667) (1.697) (0.248) (1.782)
Log_OperCycle 0.003 0.002** 0.002 0.002**
(1.477) (2.094) (1.179) (2.077)
Dividend 0.080*** 0.031*** 0.069*** 0.032***
(5.684) (4.601) (5.534) (4.915)
Losses 0.026* 0.025*** 0.023* 0.023***
(1.709) (6.357) (1.698) (5.394)
Altman Z 0.056*** 0.009*** 0.054*** 0.009***
(7.752) (3.801) (8.263) (3.637)
BoardInd 0.096*** 0.001 0.079*** 0.004
(2.908) (0.070) (2.723) (0.274)
BSize 0.007*** 0.002* 0.006** 0.002*
(2.740) (1.890) (2.546) (1.788)
Duality 0.003 0.006 0.006 0.003
(0.087) (0.603) (0.236) (0.291)
Constant Yes Yes Yes Yes
Ind FE Yes Yes Yes Yes
Firm cluster Yes Yes Yes Yes
Year cluster Yes Yes Yes Yes
F 22.45 46.87 23.45 391.81
p>F 0.000 0.000 0.000 0.000
2
R 0.228 0.182 0.228 0.174
Obs. 1239 1915 1289 1865

Note: This table reports the results of the impact of boardroom gender diversity (BGD) on overinvestment and underinvestment. t-statistics in parentheses
are based on two-dimensional clustered standard errors at firm and year level. The definition and estimation method of these variables is summarized
in Table 1.
***Significance at 1% level.
**Significance at 5% level.
*Significance at 10%.

FAROOQ ET AL.
however, their significance level and direction of association remain
unchanged compared with the earlier analysis. Thus, we conclude that
our findings are robust to correction for the two-step method in
estimating IE.
5.7 | BGD and overinvestment and
underinvestment
Finally, we extend our prior analysis by testing whether BGD miti-
gates both overinvestment (OI) and underinvestment (UI). Following
prior literature (Chen, Sun, et al., 2016; Gomariz & Ballesta, 2014; Lai
et al., 2014; Richardson, 2006), we split our sample into the proxies
for OI and UI using the residuals from Equations (1) and (2). The posi-
tive (negative) residuals represent investments higher (lower) than the
optimum investment level and are thus categorized as OI (UI). For
ease of interpretation, we multiply all estimates of UI (negative resid-
uals) with “1”. Therefore, a higher absolute value of UI represents
higher level of UI. The results of this analysis are presented in
Table 12.
Column (1) documents the association between P_GenderDiv and
overinvestment (OI_Chen) when measured by the Chen et al. (2011)
method. The results indicate the negative coefficient (0.070) on
P_GenderDiv is statistically significant at 10% (p < 0.10), suggesting
that the higher proportion of female directors mitigates over-
investment. Column (2) shows the findings of empirical analysis on
the impact of BGD on underinvestment (UI_Chen), when UI is
estimated using the Chen et al. (2011) model. The coefficient on
P_GenderDiv is negative (0.044) and statistically significant at 5%
(p < 0.05), indicating that BGD also improves investment efficiency by
reducing underinvestment. In columns (3) and (4), we repeat this anal-
ysis when overinvestment (OI_Biddle) and underinvestment (UI_Biddle)
are estimated using the Biddle et al. (2009) method. Overall, the coef-
ficients on P_GenderDiv in both columns remain negative and statisti-
10
cally significant, which further corroborates our earlier findings.
Overall, this additional analysis provides further support to our earlier
analysis that the female directors on corporate boards improve the
efficiency of investments by mitigating concerns around both over-
investment and underinvestment problems.
6 | C O N CL U S I O N
This study investigates the impact of board gender diversity (BGD) on
investment inefficiency (IE). Based on agency theory (AT), resource
dependence theory (RDT), and recent empirical evidence, we draw
our arguments and propose that firms with female directors will miti-
gate IE through three channels: by offering their active participation
via board dynamics, aligning CEOs interests with shareholders
through creating stewardship effect, and by reducing information
asymmetry. More specifically, for our first channel, that is, board
dynamics, we propose that female directors through their participa-
tion in board activities such as board meetings and governance
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27
subcommittees are more likely to ask questions about viability and
rationality of investments. Through their stringent monitoring and
active participation, they will scrutinize firm investments, such as
asking questions on their rationality and profitability, evaluate
prior investments, and the firm's profitability within industry (Chen,
Crossland, et al., 2016). Second, we argued that female directors will
create a stewardship effect on CEOs, for example, by offering them
equity-based compensation or terminating poorly performing CEOs.
The stewardship effect will align CEOs interests with firms and will
mitigate IE. Third, female directors will reduce information asymmetry
and such rich information environment will raise market confidence
on availability of profitable investments and will ease supply of capital.
Using a sample of UK firms between 2005 and 2018, we show that
board BGD mitigates IE. We also find support to our proposed chan-
nels. Our findings are robust to alternative proxies of BGD and IE, cor-
recting for endogeneity bias and using the Chen, Leung, et al. (2018)
method to mitigate potential bias associated with the two-step invest-
ment estimation method. Using a regulatory change as an exogenous
shock, our difference-in-differences analysis shows a positive
impact of the regulatory change on the relationship between BGD
and IE. We find evidence to support the critical mass perspective
since the presence of three or more female directors has the strongest
effect on policy-making. Finally, we also show that the reduction in IE
is driven by a reduction in both overinvestment and underinvestment.
The most significant policy implication from our empirical findings
is that the recent policy initiatives by the UK FRC, the UK Govern-
ment, and the UK Financial Conduct Authority (UK FCA) on improving
the representation of females on the UK's corporate boards appear to
work. Gender diverse boards strengthen board monitoring and could
benefit firms by reducing inefficient investments. Under the current
level of corporate governance in the United Kingdom, BGD could
have beneficial effects on the quality of firms' investment decisions.
Second, our study endorses recent regulatory calls encouraging firms
to increase the proportion of females on corporate boards
(e.g., Hampton-Alexander, 2018) to deter tick-box compliance prac-
tices and achieve critical mass. Our findings recommend that boards
with fewer female directors should increase the number of female
directors, because firms with three or more female directors have a
more pronounced effect on discretionary investments. Third, our find-
ings have implications for shareholders and corporate stakeholders by
documenting robust evidence that the presence of female directors
on boards means that firms' resources are better safeguarded, and
managerial opportunistic activity is less tolerated. The presence of
females on boards represents surety to shareholders and corporate
stakeholders that their interests will be well-protected and that the
firm is not committed only to strengthening its corporate governance
but also believes in social equality. Shareholders, lenders, and other
corporate stakeholders should consider these factors before making
any investment or lending decisions.
Our study has a number of limitations that also provide directions
for future research. This study explores the association between BGD
and inefficient investments and considers most of the UK publicly
listed companies for which financial and governance data were

28
available on the Bloomberg Terminal. We acknowledge that the
sample is limited to one market, and therefore, the results may not be
generalizable to all the firms or all markets. It is likely that the associa-
tion between BGD and inefficient investments may be different in dif-
ferent markets because of variations in institutional settings, financial
development, and national culture. Future studies can extend the
empirical analysis in a multicountry setting. Furthermore, owing to
unavailability of data, we could not test the impacts of female direc-
tors' demographic characteristics such as the education and profes-
sional background which could make significant difference. As
overseeing the investment decisions would require significant finan-
cial knowledge, it would be interesting to see whether female direc-
tors with finance degrees play a stronger role in investment decisions.
Therefore, we call for further research to investigate more granular
characteristics at director level to better understand the role of female
directors in improving corporate investment efficiency.
ACKNOWLEDGMENTS
We would like to thank the editor and two anonymous reviewers for
their useful comments on earlier versions of this paper.
CONF LICT OF IN TE RE ST
There is no conflict of interest with third party (s) or with any other
author or publisher.
DATA AVAI LAB ILITY S TATEMENT
The data that support the findings of this study are available from the
corresponding author upon reasonable request.
ORCID
Sanaullah Farooq https://orcid.org/0000-0003-0672-7721
Muhammad Nadeem https://orcid.org/0000-0002-8877-4400
NOTES
1
Marginal q is the ratio of the market value of an additional unit of capi-
tal to its replacement cost.
2
Volatility of future performance and cost of debt.
3 default risk? The role of growth opportunities and stock liquidity. Inter-
We also perform additional analysis by dropping the financial firms and
our results were qualitatively similar to the main results. We thank an
anonymous referee for this suggestion.
4
We multiplied the coefficient of P_GenderDiv, that is, 0.043 as shown
in Column 2 of Table 5 by 0.10 which corresponds to a 10% increase in
female directors' proportion (P_GenderDiv). This gives a value of
0.0043 which quantifies the magnitude of the reduction in IE_Chen as
a result of the increase in P_GenderDiv by 10%. This value accounts for
a 6.32% reduction in IE_Chen from its median value of 0.068.
5
In untabulated results, we find that the association between the proxies
for BGD and the estimates of IE remains persistently negative and
statistically significant for lag 2 (t-2) and lag 3 (t-3) specifications.
6
For the sake of brevity, we only report second-stage regression results.
7
Our unreported analysis shows that P_GenderDiv was only 7.2% in
2005 and it only increased to 10.3% in 2011. However, P_GenderDiv
drastically rose to 27.2% in 2018.
8
We also check the impact of the regulatory shock through subsample
analysis where we divide our sample into pre-regulatory and
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FAROOQ ET AL.
post-regulatory periods. Our untabulated results show that the relation-
ship between BGD and IE was significant only in the post-period, indi-
cating the strong effect of regulation on the role of BGD in corporate
outcomes. We thank an anonymous reviewer for this suggestion.
9
In our untabulated results, we also repeat our analysis using the invest-
ment inefficiency model of Stoughton et al. (2017). Our results remain
statistically significant. We thank an anonymous reviewer for the valu-
able suggestion.
10
In untabulated results, the association between alternative proxies for
BGD and estimates of OI & UI remained negative and statistically sig-
nificant. We thank two anonymous referees for this suggestion.
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AUTHOR BIOGRAPHIES
Sanaullah Farooq holds a PhD in Accounting & Finance from the
Department of Financial and Business System, Faculty of Agri-
business & Commerce, Lincoln University, Christchurch, New
Zealand. His research interests include corporate governance,
financial reporting quality, corporate finance and corporate social
responsibility.
Professor Christopher Gan is Head of Department, Department
of Financial and Business System, Faculty of Agribusiness &
Commerce, Lincoln University, Christchurch, New Zealand. He is
recognized internationally for research leadership in banking,
microfinance, stock markets and Asian financial economics. His
approach is quantitative in nature with an applied focus. He has
an extensive publication record in well-ranked peer reviewed
journals and is regularly cited by other researchers. He serves on
editorial boards of several distinguished international journals. He
has won several awards for excellence in teaching including the
National Teaching Excellence Award in 2003.
Muhammad Nadeem is currently affiliated with the Otago Busi-
ness School, University of Otago, New Zealand. He holds a PhD
in Accounting and Finance. His research interests include corpo-
rate governance, corporate social responsibility, environmental
accounting and auditing, and non-financial reporting. He has pub-
lished in the British Accounting Review, British Journal of Manage-
ment, Corporate Governance: An International Review, Journal of
Business Finance & Accounting and Journal of Business Ethics,
among others.
How to cite this article: Farooq, S., Gan, C., & Nadeem, M.
(2023). Boardroom gender diversity and investment
inefficiency: New evidence from the United Kingdom.
Corporate Governance: An International Review, 31(1), 2–32.
https://doi.org/10.1111/corg.12443
 14678683, 2023, 1, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/corg.12443 by Saitama University, Wiley Online Library on [21/04/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
32 FAROOQ ET AL.

APP E NDIX A: Boardroom Gender diversity and investment inefficiency: Subsample Analysis

DV = IE_Chen DV = IE_Biddle

(1) (2) (3) (4)

Low_FRQ High_FRQ Low_FRQ High_FRQ

P_GenderDiv 0.095*** 0.002 0.090*** 0.000
(3.051) (0.068) (2.913) (0.001)
Lev 0.040* 0.024 0.037* 0.021
(1.695) (1.450) (1.687) (1.439)
Log_Age 0.009** 0.011*** 0.008** 0.010***
(2.439) (3.420) (2.374) (3.259)
Log_Assets 0.006 0.004 0.005 0.003
(1.041) (1.256) (1.083) (1.053)
Tangibility 0.034*** 0.018** 0.029*** 0.015**
(2.993) (2.562) (2.726) (2.193)
Book_to_Mkt 0.016* 0.003 0.019** 0.004
(1.732) (0.572) (2.155) (0.729)
σInv 0.215*** 0.147*** 0.187*** 0.123***
(4.524) (3.194) (4.730) (3.093)
Slack 0.002 0.082** 0.002 0.070**
(0.046) (2.075) (0.057) (2.042)
Log_OperCycle 0.002* 0.002 0.002* 0.002
(1.703) (1.106) (1.786) (1.345)
Dividend 0.075*** 0.037*** 0.069*** 0.034***
(4.305) (3.852) (4.265) (4.167)
Losses 0.011 0.030*** 0.009 0.027***
(1.141) (3.145) (0.990) (2.973)
Altman Z 0.030*** 0.023*** 0.030*** 0.022***
(4.526) (4.445) (4.818) (4.815)
BoardInd 0.048 0.043 0.045 0.033
(1.637) (1.450) (1.669) (1.256)
BSize 0.005* 0.004** 0.005** 0.003**
(1.886) (2.277) (2.071) (2.107)
Duality 0.024 0.009 0.023 0.009
(0.941) (0.494) (0.887) (0.560)
Constant Yes Yes Yes Yes
Ind FE Yes Yes Yes Yes
Firm cluster Yes Yes Yes Yes
Year cluster Yes Yes Yes Yes
Adj. R-sq 0.184 0.163 0.179 0.159

Note: This table reports the results of the impact of boardroom gender diversity. (BGD) on investment inefficiency (IE) based on high and low financial
reporting quality (FRQ) subsamples. t-statistics in parentheses are based on two-dimensional clustered standard errors at firm and year level. The
definition and estimation method of these variables is summarized in Table 1.
*** Significance at 1% level.
** Significance at 5% level.
* Significance at 10%.