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Journal ArticleDOI

CEO Gender, Corporate Risk-Taking, and the Efficiency of Capital Allocation

TL;DR: In this paper, the authors 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 running by male CEOs, and that transitions from male to female CEOs are associated with economically and statistically significant reductions in corporate risk-taking.
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.

Summary (4 min read)

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.
  • These findings are based on evidence from four different samples that are specifically selected to mitigate different endogeneity concerns.
  • First, the authors 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.
  • The authors add to this literature by documenting significant differences in the risk-taking profile of firms run by male and female CEOs.

2. Data

  • Most of the data used in the paper are taken from Amadeus Top 250,000 and Worldscope.
  • From this database the authors gather information on the name of the CEO, ownership data, and accounting data for every European privately-held and publicly-traded company that satisfies a minimum size threshold.
  • The authors gather the data from the annual Amadeus Top 250,000 DVDs.6.
  • By doing so, no firms are dropped from the sample.
  • Those are primarily Eastern European countries and smaller countries such as Liechtenstein and Monaco.

2.1. CEO Gender

  • The authors identify the gender of a CEO primarily based on his/her first name, as reported in “Amadeus Top 250,000.”.
  • The authors also use this information to classify those same individuals in the prior years.
  • If these methods do not conclusively identify the CEO’s gender, the authors employ country-specific internet-based sources to classify gender based on each individual’s first name.
  • Simone is used for women in France but for men in Italy.
  • Finally, when the authors could not identify the gender from the names lists found on the 7.

2.2. Risk-Taking

  • The first measure, Leverage, is a measure of the riskiness of corporate financing choices.
  • Leverage is defined as the ratio of financial debt divided by the sum of financial debt plus equity.
  • This variable captures the riskiness of investment decisions.
  • Across all firms in the sample, the average volatility of ROA is 4.8%.

2.3. Control Variables

  • The models employed in their analyses include a number of firm-level control variables.
  • Since a high level of ownership aligns the CEO’s incentives with those of minority shareholders, the authors use CEO ownership to control for agency conflicts.
  • This is computed by multiplying the individual’s ownership in the firm by the firm’s book value of equity.
  • To reduce the impact of outliers, the authors winsorize the accounting variables (other than sales growth, σ(ROA), and leverage) at the top and bottom 1% of the distribution.
  • With respect to CEO characteristics, the authors notice that female CEOs tend to own a larger share of the equity of the firms that they run.

3. CEO Gender and Corporate Risk-Taking

  • To investigate the relation between CEO gender and corporate risk-taking, the authors start by regressing their measures of risk-taking on CEO gender and other determinants of risk-taking that, if excluded, could induce spurious correlations.
  • Regression (1) is a panel ordinary least squares (OLS) regression with standard errors clustered at the firm level.
  • The results of Regression (1) indicate that firms run by female CEOs use significantly less leverage and therefore take less financial risk than firms run by male CEOs.
  • The coefficient on the gender variable has a p-value of less than 0.001.
  • The comparison of the firm and CEO characteristics tabulated in Table 1 makes the issue of non-random selection immediately apparent.

3.1. Propensity Score Matched Samples

  • The authors begin their analysis of the differences in corporate risk-taking between female and male CEOs by employing a propensity score matching procedure (Rosenbaum and Rubin, 1983).
  • To ensure that the firms in the control sample are sufficiently similar to the firms run by a female CEO, the authors require that the maximum difference between the propensity score of the firm run by a female CEO and that of its matching (male CEO run) peer does not exceed 0.1% in absolute value.
  • A comparison of Leverage, σ(ROA), and Likelihood of survival between the matched samples reveals that, firms with female CEOs tend to take less risk than firms with male CEOs even when several other observable characteristics between the firm pairs are virtually identical.
  • All differences in risk-taking between the two groups are statistically significant with p-values of less than 0.001.
  • Even with this very restrictive matching, their conclusions remain unchanged.

3.2. Regression Analysis of Transition Firms

  • A limitation of the propensity score matching results is that the documented correlation between CEO gender and corporate risk-taking may simply reflect unobservable characteristics that influence both CEO gender choice and corporate risk-taking choices.
  • For this purpose, the authors run regressions with firm fixed effects.
  • A possible concern with the analysis of CEO transitions is that they are likely to be accompanied by changes in CEO characteristics other than gender.
  • Therefore, with this test the authors cannot rule out the omitted variable issue completely.

3.3. Propensity Score Matching Analysis of Transition Firms

  • One specific concern with the transition sample is that transitions occur at “special” times.
  • The difference between the change in leverage of the transition firms and that of the control group is statistically significant with a p-value of less than 0.001.
  • While the authors again acknowledge that CEO gender might not be randomly assigned, this result provides additional evidence of changes in corporate risk-taking around CEO transitions.
  • As the authors have discussed, those methodologies are not free of possible limitations.
  • To facilitate identification, in the first stage the authors use an exogenous determinant of the likelihood that the board might appoint a female CEO.

4. CEO Gender and the Efficiency of Capital Allocation

  • So far the authors have documented that female CEOs make less risky corporate choices than male CEOs.
  • The authors employ two approaches to measure the efficiency of capital allocation.
  • First, the authors use the approach proposed by Wurgler (2000) - - and use value added growth to proxy for the quality of investment opportunities.
  • The Wurgler approach is discussed in Section 4.1.
  • In Section 4.3., the authors discuss the possible explanations for the lesser degree of efficiency of capital allocation observed among female CEOs.

4.1. Value Added Growth

  • In order to achieve an efficient allocation, capital should be invested in sectors with good investment opportunities and be withdrawn from those sectors that have poor investment opportunities.
  • Accordingly, value added growth is used as a proxy for the quality of investment opportunities.
  • By contrast, the coefficient on the interaction between CEO gender and value added growth is negative and significant (coeff. = -0.073, p-value < 0.001), implying that, corporate investments are less responsive to value added growth in firms run by female CEOs.
  • Regression (2) indicates the results are also robust to using a treatment effects specification which partially controls for the endogeneity of the CEO selection choice.
  • The index ranges from 0 to 3, with higher scores denoting greater risk-avoidance.

4.2. Marginal Q

  • Additionally, marginal Q can only be computed for publicly traded firms.
  • The extent to which it can be used to proxy for the quality of investment opportunities faced by private firms is, of course, subject to debate.
  • With those caveats in mind, the authors note that optimal decision making in perfect capital markets requires that managers undertake all projects with positive expected net present value, and reject all projects with negative expected net present value.
  • By contrast, the coefficient on the interaction between CEO gender and marginal Q is negative and significant (coeff. = -0.020, p-value < 0.001), once again implying that corporate investments are less responsive to marginal Q in firms run by female CEOs.
  • In Regression (3) the authors augment their specification with the index that measures the degree of risk-avoidance and the interaction of this index with marginal Q.

4.3. Interpretation of the Evidence

  • There are two possible (non-mutually exclusive) explanations for the less efficient capital allocation observed among female CEOs.
  • The second source of inefficiency is overinvestment.
  • For firms with poor investment opportunities, female CEOs may be reluctant to make divestitures and thus overinvest.
  • Unfortunately, due to data limitations, the precise channel behind their results is difficult to identify empirically.
  • More specifically, Amadeus Top 250,000 does not report gross investment and divestitures separately.

5. Discussion

  • Besides traditional explanations such as agency and informational asymmetries, possible economic reasons for why CEO gender could “influence” risk-taking include (but are not limited to) more pronounced risk-aversion in female CEOs (compared to male peers), less overconfidence, differences in incentives structures, differences in unemployment risk, and social norms.
  • More specifically, if corporate risk-taking is positively correlated with the likelihood that a CEO loses his/her job, and if finding a new job is more difficult for women than men, women might choose to self-select into low risk firms or to reduce firm risk once they have become a CEO.
  • Indeed, across the countries and over the time period included in their study, the average unemployment rate among women who previously held a managerial position is 3.9%.
  • Geiler and Renneboog (2015) reach a similar conclusion using a U.K. sample - - although these authors document gender pay gaps for lower ranked executives.

6. Conclusions.

  • The authors investigate how CEO gender relates to corporate risk-taking choices.
  • The authors document that firms run by female CEOs tend to make financing and investment choices that are less risky than those of otherwise similar firms run by male CEOs.
  • Overall, at least in their sample, it appears that women who climbed the corporate ladder are different from their male peers.
  • The results do not appear to be driven by unobserved CEO or firm traits that could give rise to non-random self-selection.
  • Importantly, in their large sample of female CEOs, the authors document that gender-related differences in risk-taking documented in experimental economics and psychology studies extend to top corporate executives.

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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
Published in:
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.

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