Risk Preferences of Gender‐Diverse Boards: Evidence from CEO Debt‐like Compensation
| Published date | 01 October 2023 |
| Author | Vikram Nanda,Andrew Prevost,Arun Upadhyay |
| Date | 01 October 2023 |
| DOI | http://doi.org/10.1111/1467-8551.12696 |
British Journal of Management, Vol. 34, 2263–2289 (2023)
DOI: 10.1111/1467-8551.12696
Risk Preferences of Gender-Diverse Boards:
Evidence from CEO Debt-like
Compensation
Vikram Nanda,1Andrew Prevost2and Arun Upadhyay3
1Naveen Jindal School of Management, University of Texas, Dallas, TX, USA, 2Grossman School of Business,
University of Vermont, Burlington, VT, 05405, USA, and 3College of Business, Florida International
University, Miami, FL, 33199, USA
Corresponding author email: andrew.prevost@uvm.edu
Wehypothesize that gender-diverse boards manage CEO risk-taking preferences through
the debt-like component of CEO compensation. We provide empirical evidence of a
strong positive association between the proportion of independent female directors and
debt-like pension compensation for a sample of US rms. Our key results are ro-
bust to a least-squares framework that includes rm xed effects to address poten-
tial omitted variable bias, and we also nd evidence that higher proportions of in-
dependent female directors are associated with lower CEO option compensation and
more intensive use of restricted stock grants. We obtain corroborating results from
a difference-in-differences approach using California’s 2018 board gender quota law
(SB 826) as a quasi-experiment. Consistently, gender-diverse boards reduce the cost
of debt among rms that are closer to nancial distress and for longer maturity bond
issues.
Introduction
Motivated by a developed social and experimen-
tal psychology literature (e.g. Byrnes, 1999; Pow-
ell and Ansic, 1997) providing theoretical sup-
port and empirical evidence that women differ
from men with respect to overcondence, altruism,
long-term orientation, and risk aversion, a rapidly
expanding stream of business research provides
supporting evidence that gender differences in cor-
porate leadership affect risk: rms with female ex-
ecutives undertake less risky corporate decisions
(e.g. Faccio, Marchica and Mura, 2016; Huang
and Kisgen, 2013; Janahi, Millo and Voulgaris,
2021; Menicucci and Paolucci, 2022), and boards
with greater gender diversity limit CEO choices
that would increase risk (e.g. Abou-El-Sood, 2021;
Karavitis, Kokas and Tsoukas, 2021; Levi, Li and
Zhang, 2014).1While this literature provides a the-
oretical framework forwhy boards with greater fe-
male representation prefer less risk and consistent
empirical evidence that these preferences aremani-
fested in conservativeoperating policies, an impor-
tant yet relatively unexplored aspect is the mech-
anism through which gender-diverse boards align
CEO incentives with their preferences.
1As Rodríguez-Domínguez, García-Sánchez and
Gallego-Álvarez (2012) discuss, prior work reports
mixed ndings on an association between board gender
diversity and corporate performance. While some re-
searchers document a positive association (e.g. Carter,
Simkins and Simpson, 2003; Zolotoy, Akhtar and Veer-
araghavan, 2021), others report a null (e.g. Richard,
2000; Randöy et al., 2006; Rose, 2007) or negative (e.g.,
Böhren and Ström, 2005) association.
© 2022 British Academy of Management.
2264 Nanda et al.
In this paper, we investigate if board gender di-
versity is associated with CEO debt-like compen-
sation components that discourage corporaterisk-
taking and incentivize a long-term perspective.
Following prior research (e.g. Campbell, Galpin
and Johnson, 2016) demonstrating that boards
actively manage CEO risk-taking preferences
through the rm’s executive debt-like compensa-
tion policy, we expectgender-diverse boards to of-
fer compensation contracts that strengthen CEO
incentive alignment with creditors. This follows
from Jensen and Meckling’s (1976) argument that
debt-like compensation may alleviate risk-shifting
conicts between stockholders and bondholders
that result from equity incentive compensation. In
line with this view, Edmans and Liu (2011) predict
that managers with higher proportions of inside
debt to rm debt are more likely to choose con-
servative operating policies, while Sundaram and
Yermack (2007) demonstrate that managers with
higher inside debt behave more conservatively.
Our results support this premise. Using the
logit and tobit regression methodologies and
a 9842-observation sample comprising US rms
drawn fromthe Execucomp dataset over the 2006–
2020 period, our baseline ndings indicate that
the proportion of independent female directors
has a signicant positive cross-sectional associa-
tion with alternative measures of CEO debt-like
compensation. These results are economically
signicant. For example, a one standard deviation
(10.4%) increase from the mean in the proportion
of independent female directors is associated an
estimated increase of 21% in the CEO’s annual
increment to pension value. Our key results are
robust to a least-squares framework that includes
rm xed effects to address potential omitted
variable bias, and we also nd evidence that higher
proportions of independent female directors are
associated with lower CEO option compensation
and higher restricted stock grants. We exploit
the adoption of California’s board gender quota
law (SB 826) in 2018 as a quasi-experiment.
Consistent with the cross-sectional ndings,
our difference-in-differences results demonstrate
that California-headquartered rms signicantly
increased annual CEO pension compensation
following the adoption of SB 826 relative to a
matched set of control rms. Finally, we explore
the implications of our results on the cost ofcor-
porate debt capital. Consistent with the pension
compensation results, our ndings demonstrate
a negative association between the proportion of
independent female directors and corporate bond
yield spreads among longer-maturity debt issued
by rms that are closer to nancial distress.
Our ndings contribute to prior research in sev-
eral ways. First, our results contribute to the debate
on how independent directors affect corporate
policies. While a theoretical literature posits that
independent directors inuence CEO decisions
through compensation contracts, thelimited ex-
tant work offersmixed evidence. Core, Holthausen
and Larcker (1999) report that CEO compensa-
tion is increases in the proportion of outside di-
rectors. However, they nd thatdirectors co-opted
by the CEO drive the effect, a nding supported
by Coles, Daniel and Naveen (2014). Second, ex-
ecutive compensation typically includes a substan-
tial amount of pension and deferred compensa-
tion along with cash and equity incentives (e.g.
Bebchuk and Jackson, 2005; Wei and Yermack,
2011). Prior research generally focuses on how
CEO debt-like compensation is associated with
corporate investments and the rm’s risk prole
(e.g. Cassell et al., 2012; Liu, Mauer and Zhang,
2014; Phan, 2014; Sundaram and Yermack, 2007),
but the question of why some rms offer such com-
pensation while others do not is underexplored.
Third, our paper provides a better understand-
ing of the gender-level board dynamics that af-
fect CEO inside debt compensation and support
the notion that female board members could help
rms to achieve a balance between managers’ in-
centives to undertake valuable risky investments
with a system that deters shirking and risk-shifting
(e.g. Laux, 2015).
Literature review and hypothesis
development
Literature review
Prior research provides evidence that board char-
acteristics, including gender diversity, affect CEO
compensation contracting. Forexample, Westphal
and Jazac (1995) show that CEO compensation is
a function of similarities between the CEO and
directors in terms of their background and de-
mographic characteristics. To the extent that fe-
male directors play an important role in board
decision-making (e.g. Adams and Ferreira, 2009;
Ahern and Dittmar, 2012; Eckbo, Nygaard and
Thorburn, 2019; Matsa and Miller, 2013; Sun, Xu
© 2022 British Academy of Management.
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