Impact of board gender composition on corporate debt maturity structures

• Published date: 01 November 2019
• Author: Yiwei Li,Xiu‐Ye Zhang
• DOI: http://doi.org/10.1111/eufm.12214
• Date: 01 November 2019

DOI: 10.1111/eufm.12214

ORIGINAL ARTICLE

Impact of board gender composition on corporate

debt maturity structures

Yiwei Li

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Xiu-Ye Zhang

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Essex Business School, University of

Essex, Colchester CO4 3SQ, UK

Email: yiwei.li@essex.ac.uk

2

College of Business and Economics,

The Australian National University,

Acton, Canberra 2600, Australia

Email: xiu-ye.zhang@anu.edu.au

Abstract

This paper examines the effect of female directors on

corporate debt maturity structures. We find that firms with a

higher ratio of female directors tend to have a larger

proportion of short-maturity debt. This effect is more

pronounced with female independent directors and is

insignificant with female inside directors. These findings

remain robust under propensity score matching and

instrumental variable approaches to address potential

endogeneity concerns. Furthermore, we find that our results

are driven primarily by firms with weak governance quality

and low financial constraints. We also find that the effect

does not differ between high- and low-leveraged firms, and

there is a negative relation between female directors and

likelihood of overinvestment. This evidence suggests that

female directors view short-term debt as a monitoring

device.

KEYWORDS

debt maturity, gender diversity, female directors

JEL CLASSIFICATION

G30, G32, J16

We thank John Doukas (the Editor), two anonymous referees, and participants at the 41st EAA Annual Congress for very

insightful comments and helpful suggestions. All errors are our own.

Eur Financ Manag. 2018;1–35. wileyonlinelibrary.com/journal/eufm © 2019 John Wiley & Sons, Ltd.

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1286 © 2018 John Wiley & Sons, Ltd. wileyonlinelibrary.com/journal/eufm Eur Financ Manag. 2019;25:1286–1320.

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INTRODUCTION

Gender diversity in corporate boardrooms was originally advocated as a matter of justice and human

rights. However, whether it also gives rise to a range of positive economic outcomes remains unclear.

There is a growing literature investigating the effects of gender-diverse boards since Norway first

initiated mandatory requirements for gender diversity on boards, which has subsequently been adopted

by many other countries. Insofar as this issue has been examined directly, the vast majority of studies

focus on the ultimate effects on firm value or financial performance (see, e.g., Adams & Ferreira, 2009;

Ahern & Dittmar, 2012; Carter, Simkins, & Simpson, 2003; Farrell & Hersch, 2005). However, since

female directors may have different attitudes toward governance and bring a different kind of

deliberation in discussions than their male counterparts, they could have particular influences on

corporate policies in the process of decision-making.

An emerging body of research investigates the monitoring role of female directors in such

corporate decisions as dividend payout policy (see, e.g., Chen, Leung, & Goergen, 2017), executive

compensation (see, e.g., Carter, Franco, & Gine, 2017), and mergers and acquisitions (see, e.g., Levi,

Li, & Zhang, 2014). However, one type of important corporate policy, debt maturity structure, has

remained largely unexplored.

Corporate debt maturity structure is not only one of the key elements of corporate financial policy,

it is also believed to be an important corporate governance device. Barnea, Haugen, and Senbet (1980)

argue that shorter-term debt can reduce managerial incentives to increase risk. Jensen (1986) notes the

monitoring role of short-term debt in alleviating overinvestment behavior. Short-term debt also has

been shown to alleviate the agency costs stemming from managerial discretion by subjecting managers

to more frequent monitoring from debtholders (Rajan & Winton, 1995; Stulz, 2001). Therefore, it is

important to understand whether female directors influence corporate capital structure decisions by

choosing a particular debt maturity structure and utilizing it as a monitoring device.

We aim to test the effect of gender diversity on corporate debt maturity by examining whether

there are systematic differences in the choice of debt maturity in the presence of female directors. We

argue that female directors place more emphasis on monitoring, and thus are more likely to use short-

term debt as a governance mechanism to monitor managers’actions. First, empirical evidence

suggests that female directors focus more on monitoring than male directors. Gender diversity in the

boardroom thus has significant implications for board dynamics. The presence of female directors on

boards brings not only different perspectives, skills, and knowledge, but also different values and

norms (Gul, Srinidhi, & Ng, 2011; Miller & del Carmen Triana, 2009). Moreover, gender-diverse

boards are associated with more in-depth board deliberations and less conformity of attitudes

(Adams, Gary, & Nowland, 2011; Clarke, 2005; Huse & Grethe Solberg, 2006; McInerney-

Lacombe, Bilimoria, & Salipante, 2008). Gender diversity on boards thus encourages more

competitive interaction in the boardroom as well as more effective board communication. In addition,

recent studies indicate that female directors provide greater oversight and monitoring of managers’

behavior and actions. For example, Adams and Ferreira (2009) observe that female directors are

more likely to undertake increased monitoring, attend more board meetings, and demand greater

accountability for poor performance from managers.

Second, short-term debt can motivate managers to align their interests with shareholder interests

more effectively by reducing the cash flow available to be spent at the discretion of managers. Short-

term debt therefore serves as an effective monitoring instrument by avoiding the potential for

inefficient investment by managers, consequently controlling managerial overinvestment behavior.

The threat caused by failure to make short-term debt payments also enhances manager incentives to

improve the efficiency of fund utilization (Hart & Moore, 1994).

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Given the characteristics of monitoring by female directors and of short-term debt, it is possible that

female directors are more likely to use short-term debt to monitor managers than are male directors. We

expect this effect to be weaker when overinvestment is less likely, that is, when other corporate

governance mechanisms are strong and managers are subject to financial constraints.

However, there are competing views that oppose this argument, and the influence of female

directors on corporate governance is controversial. Corporations may use gender diversity only to

convey the appearance that they are complying with social norms and expectations of how firms

should behave, while in reality female directors might be marginalized and play no significant role

in governance. If this were the case, we would not find an association between gender diversity and

debt maturity. Moreover, some studies document unfavorable outcomes with regard to board

gender diversity. For instance, Ahern and Dittmar (2012) find that mandatory female board

representation causes a significant drop in firm value, mainly because boards became younger and

less experienced. Again, if this were the case, we would not be able to find systematic evidence of

an association between gender diversity and debt maturity in situations where governance is

critical.

We examine whether there is a positive relationship between female directors and short-term debt

by using a sample taken from the S&P 1500 for the period 1997–2016. We show that firms with a

greater proportion of female directors are more likely to adopt a shorter debt maturity structure than

firms with a lower proportion of female directors. Our results are more pronounced when only

independent female directors are examined. Our findings remain robust after implementing the

propensity score matching (PSM) and instrumental variable (IV) approaches to control for firm and

debt characteristics and other potential endogeneity issues.

Further, we find that our full sample results are driven by firms with weak governance quality and

higher governance needs, as proxied by the managerial entrenchment index (E-index) (Bebchuk,

Cohen, & Ferrell, 2009) and analyst coverage. This finding is consistent with our main argument that,

compared with male directors, female directors are more likely to adopt shorter debt maturity structure

as a monitoring and governance mechanism in firms with weak corporate governance quality and

higher corporate governance needs. We also find that the positive relationship between female

directors and short-term debt disappears for firms with financial constraints, since the overinvestment

associated with a free cash flow agency problem decreases due to the decline in internal cash flow and

financial constraints under such circumstances. We also address concerns over the confounding effects

from debtholder monitoring by comparing different debtholders’power through classifying firms into

high-leveraged and low-leveraged groups. Our results show that the association between female

directors and debt maturity structure does not vary across high- and low-leveraged firms. More

directly, we further present evidence that female directors reduce the likelihood of overinvestment. We

also exclude the alternative explanation that women in general are more risk averse, and thereby more

likely to choose less risky short-term debt, by comparing the effects from independent and inside

female directors.

Taken together, our findings are consistent with our argument that female directors are more likely

to use short-term debt as a corporate governance device, reducing the potential for managerial

opportunism and self-serving overinvestment.

We make at least three contributions to the literature. First, to the best of our knowledge, this is the

first study to investigate the corporate debt maturity consequences of having female directors on

boards. Prior literature shows conflicting findings regarding the role that female directors play; we

generate evidence that the presence of female directors is positively related to use of short-term debt.

These findings concur with research that finds female directors play a significant role in a series of

important corporate decisions (see, e.g., Carter et al., 2017; Chen et al., 2017; Levi et al., 2014).

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