Board gender diversity and investment inefficiency: An empirical evidence from the United Kingdom : A thesis submitted in partial fulfilment of the requirements for the Degree of Doctor of Philosophy at Lincoln University

Abstract

There has been a massive regulatory upsurge on enhancing the representation of female directors in corporate boardrooms. In October 2011, the UK Financial Reporting Council (FRC) updated the UK Corporate Governance Code (UK CGC). The UK CGC supporting Principle B.2 and B.2.4 now requires firms to report publicly in their annual reports about their gender diversity policy, disclosure of measurable objectives and progress they have made to achieve those objectives. In 2013, the UK Government enacted section 414C of the Companies Act 2006, requiring UK firms to disclose number of female directors in their strategic reports. The reason for these reforms is that gender diverse boards could enhance corporate boards’ governance and break the old boys’ network by allowing a pool of better qualified female directors into directorship positions. This was expected to strengthen board monitoring and its internal control systems. Despite the rising popularity of these regulations and female directors becoming an important component of UK corporate boardrooms, the question remains about how effective female directors are in aligning managers-shareholders’ interests? Efficient capital investments are of paramount importance for value creation and economic growth. Based on the neo-classical framework, investments must be driven only through its growth opportunities. However, a lack of information transparency between managers and external capital providers can result in moral hazard and adverse selection problems. Both of these can lead managers to make poor investment decisions that can result in hampering firm performance. Deriving my motivation from recent regulatory upsurges and gap in the literature, this study investigates the effect of boardroom gender diversity on investment inefficiency. Using a sample of UK listed companies from 2004 to 2018, this study provides the first empirical evidence on the causal relationship between board gender diversity and investment inefficiency as measured by its discretionary component of capital investments. Consistent with agency theory and resource dependence theory, I document a negative, statistically significant association between boardroom gender diversity and investment inefficiency. I extend my empirical analysis and, consistent with the agency cost of free cash flow hypothesis, I find that investment inefficiency is mostly concentrated in firms with high free cash flow and that female directors mitigate managerial consumption of free cash flow in inefficient investments. I further show that three or more female directors have the strongest, significant impact on investment inefficiency, i.e., consistent with critical mass theory. Finally, I find that the negative impact of board gender diversity is more valuable and significant for firms with weaker firm transparency than for firms with greater firm transparency. My findings are robust to alternative proxies of board gender diversity and investment inefficiency, correcting for endogeneity bias, and, using the Chen, Hribar, and Melessa (2018) econometric technique to correct for possible bias with the two-step investment estimation method. My findings have important implications for regulators and policymakers in designing board gender diversity policies.