The University of Manchester Research
CEO gender, corporate risk-taking, and the efficiency of
capital allocation
DOI:
10.1016/j.jcorpfin.2016.02.008
Document Version
Accepted author manuscript
Link to publication record in Manchester Research Explorer
Citation for published version (APA):
Faccio, M., Marchica, M., & Mura, R. (2016). CEO gender, corporate risk-taking, and the efficiency of capital
allocation. Journal of Corporate Finance, 39, 193–209. https://doi.org/10.1016/j.jcorpfin.2016.02.008
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Journal of Corporate Finance
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Download date:10. Aug. 2022
1
CEO Gender, Corporate Risk-Taking, and the Efficiency of Capital Allocation
Mara Faccio,
a
Maria-Teresa Marchica,
b
and Roberto Mura
c
Abstract
We extend the literature on how managerial traits relate to corporate choices by documenting
that firms run by female CEOs have lower leverage, less volatile earnings, and a higher chance
of survival than otherwise similar firms run by male CEOs. Additionally, transitions from male
to female CEOs (or vice-versa) are associated with economically and statistically significant
reductions (increases) in corporate risk-taking. The results are robust to controlling for the
endogenous matching between firms and CEOs using a variety of econometric techniques. We
further document that this risk-avoidance behavior appears to lead to distortions in the capital
allocation process. These results potentially have important macroeconomic implications for
long-term economic growth.
a
Krannert School of Management, Purdue University, 403 W. State Street, West Lafayette, IN 47907,
U.S.A. Tel: 765-496-1951. E-mail: mfaccio@purdue.edu
.
b
Manchester Business School, University of Manchester, Crawford House, Booth Street East,
Manchester, M13 9PL, U.K. Tel: +44-161-2750121. E-mail: maria.marchica@manchester.ac.uk
.
c
Manchester Business School, University of Manchester, Crawford House, Booth Street East,
Manchester, M13 9PL, U.K. Tel: +44-161-2750120. E-mail: roberto.mura@manchester.ac.uk
.
Acknowledgments: We thank an anonymous referee, Kevin Aretz, Kelley Bergsma, Paul Chaney, Dave
Denis, Diane Denis, Art Durnev, Andrea Fracasso, Marc Goergen, Scott Hsu, Markku Kaustia, Seoyoung
Kim, David Lesmond, Kai Li, Evgeny Lyandres, Ulrike Malmendier, Roni Michaely, Jeffry Netter (the
Editor), Bill O’Brien, Eric Powers, Stefano Puddu, Michael Roberts, Jeremy Stein, Anjan Thakor, Jin Xu,
Deniz Yavuz, Scott Yonker, Feng Zhang, and seminar participants at the Arison School of Business
Interdisciplinary Center, Bristol University, Cardiff Business School, DePaul, Exeter Business School,
INSEAD, Manchester Business School, Neuchatel University, Northwestern, Trento, Tulane, University
of Florida, University of Southern California, University of Verona, Wayne State, the 2015 American
Finance Association, the 2013 European Economic Association, the 2012 & 2013 Financial Management
Association Meetings, the 2014 Edinburgh Corporate Finance Conference and the Rotterdam Behavioral
Finance Conference for comments and Hossein Khatami for research assistance. We also thank Bobby
Foster from Bureau van Dijk and Mark Greenwood for technical assistance.
2
1. Introduction
Among the Fortune 500 companies, the number of female CEOs reached its historic high
in mid-2014.
1
Despite that, with a headcount of only 24 (or 4.8% of the Fortune 500 firms),
female CEOs remain an exception rather than a rule in corporate America. This “gender gap” in
corporate leadership is not specific to large U.S. firms. In fact, according to a recent Wall Street
Journal article, only 3% of the largest 145 Scandinavian companies have a female CEO.
2
Are
the women who climb to the top of the corporate ladder close substitutes for male executives?
Furthermore, are there differences in the decisions that female CEOs make after taking the
corporate reins? And, are there implications for the efficiency of the capital allocation process?
In this paper, we investigate the relation between CEO gender, corporate risk-taking
choices, and the efficiency of capital allocation. Using a large sample of privately-held and
publicly-traded European companies from the Amadeus Top 250,000 database, 9.4% of which
are run by female CEOs, we first document first that female CEOs tend to associate with less
risky firms. In the cross-section, firms run by female CEOs are less leveraged, have less volatile
earnings, and are more likely to remain in operation than firms run by male CEOs. Additionally,
in the time-series, transitions from male to female CEOs (or vice-versa) are associated with an
economically and statistically significant decline (increase) in corporate risk-taking.
These findings are based on evidence from four different samples that are specifically
selected to mitigate different endogeneity concerns. First, we compare firms run by female CEOs
to a (propensity score) matched sample of peers run by male CEOs that are virtually
indistinguishable in terms of observable characteristics. More specifically, peers are selected
1
http://fortune.com/2014/06/03/number-of-fortune-500-women-ceos-reaches-historic-high/
2
Wall Street Journal, May 21, 2014, “Even Scandinavia Has a CEO Gender Gap.”
3
from the same country, industry, year, and public/private status, and then matched on a number
of firm- and CEO-level characteristics. The basic propensity score results show that firms run by
female CEOs take significantly less risk than otherwise similar firms run by male CEOs. Second,
we employ a sample of firms experiencing a transition from male to female CEOs or vice-versa
(henceforth referred to as “transition firms”). Focusing on transition firms allows us to compare
the risk-taking of the same firms, as run by CEOs of different genders. Those tests indicate that
CEO transitions are associated with changes in corporate risk-taking. In particular, transitions
from male to female CEOs are associated with a reduction in corporate risk-taking. As the timing
of CEO transitions is unlikely to be random, we supplement our analyses with a third sample.
This consists of a propensity score matched sample of transition firms. In this analysis, we
compare the change in risk-taking observed around transitions from male to female CEOs with
the change in risk-taking of otherwise similar firms that are run by male CEOs during the entire
sample period. The propensity score matching analysis of transition firms confirms a significant
change in corporate risk-taking around CEO transitions, over and beyond what is observed
(during the same period) among otherwise identical peers.
To investigate whether CEO gender still plays a role in financial and investment policies
after explicitly accounting for self-selection due to unobservables, we employ a variation of the
Heckman two-step approach: the treatment effects model. Our choice of an exogenous
determinant of the propensity to select a female CEO is based on the familiarity of a firm’s male
directors with female CEOs. More specifically, our first stage instrumental variable is the
fraction of firms with a female CEO and above-average risk-taking among all other firms in
which the firm’s male directors also serve as directors. We argue that it is unlikely that this
familiarity, combined with above-average risk-taking (in other firms), will be correlated with
4
outcomes (in particular, risk-avoidance) except through its effect on CEO gender. The results of
the treatment effects model provide little support for the notion that the differences in corporate
risk-taking observed between firms run by female and male CEOs are due to self-selection. Thus,
the results appear to be consistent with CEO gender influencing corporate risk-taking.
To the extent that the documented differences in corporate risk-taking are driven by
female CEOs imposing their preferences on corporate choices, the efficiency of the capital
allocation process could be undermined. This would occur if female CEOs choose to forgo
positive net present value investment opportunities. For example, female CEOs of high growth
opportunity firms may be too risk-averse and fail to increase investment to fully capitalize on
these opportunities. The second source of inefficiency is overinvestment. For example, for firms
with poor investment opportunities, female CEOs may be reluctant to make divestitures and thus
overinvest.
3
To assess the efficiency of capital allocation, we borrow the basic idea from
Wurgler (2000) and estimate the sensitivity of corporate investment to value added growth. We
document that male CEOs invest more in industries that have better investment opportunities (as
proxied by higher value added growth). However, investments of firms run by female CEOs are
less sensitive to the quality of investment opportunities. Thus, female CEOs do not appear to
allocate capital as efficiently as male CEOs. Similar conclusions are reached when we use
marginal Q as the proxy for the quality of investment opportunities, as in Durnev, Morck and
Yeung (2004).
Why does CEO gender help explain corporate risk-taking? Under perfect capital markets,
managers should choose investments so as to maximize the market value of the firm. In this
framework, neither the preferences or characteristics of managers nor those of the firm’s owners
3
We thank the Referee for highlighting these channels.