Director Characteristics, Gender Balance and Insolvency Risk: An Empirical Study
Posted: 5 Jun 2009
Date Written: May 30, 2009
This study examines the characteristics of the directors and owners of private companies in the UK with a specific focus on the incidence and impact of female directors and insolvency risk. We find that women are generally under-represented in the population of UK Company directors and this varies with industry sector and over time. Our analysis of insolvency risk suggests that having female directors reduces the likelihood of insolvency and that companies with female directors appear to take on less debt and have better cash-flow. We explore three interrelated areas of literature on gender differences that may help to interpret our results. First, that there is gender difference in risk preference and behaviour i.e. males are more likely to take excessive risks. Second that companies that have ‘balanced’ boards of directors are better performers and the female director ratio proxies this balance of skills. Third, the relatively low incidence of female directors in the corporate population suggests that there are barriers (e.g. ‘glass ceiling’, Wall Street Journal, 1986) that prevent females from achieving director status and that female directors that break the ceiling are particularly effective. Finally, we consider the possibility the results are driven by the fact that either females choose to work in lower risk industries or barriers/discrimination acts to limit their choices. We analyse data on over 900,000 limited companies in 2007-8 including over 17000 that ceased trading due to insolvency in 2008. In the context of a failure prediction model, using Logit and Probit-IV regression and conditional mixed process estimates, we isolate the effects of having female directors on the likelihood of insolvency. The estimated model controls for a wide range of company financial and governance characteristics, industry and size and attempts to unravel causality. The results provide some compelling evidence of a relationship between the gender composition of directorships and insolvency risk.
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