Recent research by Gies faculty Clara Xiaoling Chen and David Godsell, together with Gies PhD graduate Dave (Young-Il) Baik, now an assistant professor at Nanyang Technological University in Singapore, has documented significant improvements in companies’ investment efficiency following regulatory interventions designed to increase gender diversity among board directors. Published in the May 2024 issue of The Accounting Review, the research also shows that mandatory and strongly enforced interventions trigger larger postintervention improvements in investment efficiency.

Board diversity has long been a topic of interest for researchers. According to Godsell, at least 3,300 studies investigate the effect of diversity on company outcomes, with approximately 1,580 examining the effects of gender diversity specifically. However, it is difficult to draw causal inferences regarding the effect of board gender diversity on firm outcomes from this large literature.

“The universal problem,” Godsell explained, “is that firms simultaneously choose their level of board gender diversity and other firm characteristics, including investment efficiency. Many variables may concurrently drive both these choices, giving rise to a spurious correlation between board gender diversity and investment choices and a confounded inference about the effect of board gender diversity on investment outcomes. For example, a corporate governance reform (e.g., greater reliance on merit-based board appointment practices) may simultaneously reduce gender discrimination in board appointments and improve the efficiency of firms’ investment choices. Such a reform creates a spurious correlation between increased board gender diversity and investment efficiency.”

Baik added that “the best solution to this obstacle to credible inference is to randomly change board gender diversity across firms and over time because, then, board gender diversity is only randomly correlated with other firm characteristics. But, because few firms will let us randomly vary the gender of their board members over time, we need a different solution. And the second-best solution is to identify one or more sources of exogenous variation in board gender diversity. In our setting, a source of variation is exogenous if the change in board gender diversity is forced upon a firm by, for example, a regulatory intervention. This is helpful from a research design perspective because the change in board gender diversity is no longer a firm choice that might be correlated with other choices.”

To identify sources of exogenous variation in board gender diversity, these Gies Business researchers compiled a global catalog characterizing 83 regulatory interventions adopted in 59 countries either encouraging or mandating firms to increase board gender diversity. The criterion for inclusion in the catalog was whether a regulatory intervention put external pressure on a company to increase female representation on its corporate board.

“In our study, gender diversity was a yes or no variable,” Chen said. “So, if there is an intervention in a particular country in a particular year, it's a yes and offers an exogenous source of variation in board gender diversity. And if there's no intervention, it's a no.”

A Gies Business PhD candidate at the time, Baik led seven Gies undergraduate research assistants for 20 hours a week over seven weeks to gather the regulatory intervention data, totaling approximately 980 hours.

“The process was enriching, allowing me to work closely with undergraduate students,” Baik said. “The experience was truly transformative, and I’m deeply grateful for the opportunity to contribute to such meaningful research.”

“The broad issue we were interested in is whether adding more female directors on the board of directors would help improve firms’ investment outcomes,” Chen explained. “We collected data on 35,857 companies between 1999 and 2021, and we show that, in those firms where the country is implementing those interventions, investment efficiency improved.”

The results of their study further indicated that mandatory board gender diversity interventions triggered greater improvements in investment efficiency compared to voluntary interventions and that stronger enforcement of mandatory interventions triggered greater improvements compared to weakly enforced mandatory interventions. They further document that interventions triggering the largest postintervention increases in board gender diversity led to greater increases in investment efficiency. Taken together, these results provide researchers and policymakers with credible evidence that board gender diversity improves investment efficiency.

“This study is valuable because it offers plausibly causal inferences to policymakers debating, designing, implementing, and monitoring BGD [board gender diversity] interventions,” Baik said.

Godsell added that the study also provides an important resource for future researchers examining the effect of board gender diversity on firm outcomes.

“What we do is create this massive public good by going through this extremely onerous task of developing a catalog characterizing 83 country-level interventions in 59 countries. The catalog permits us and future researchers to draw some of the most credible and generalizable inferences you can document because it unlikely that an alternative explanation varies across countries and over time in the unique chronological pattern of these regulatory interventions.”