Do Women Stay Out of Trouble?

Anup Agrawal is Professor of Finance at the University of Alabama. This post is based on an article authored by Professor Agrawal; Binay Adhikari, Visiting Assistant Professor of Finance at Miami University; and James Malm, Assistant Professor of Finance at the College of Charleston.

Does the presence of women in a firm’s top management team affect the risk of the firm being sued? A large literature in economics and psychology finds that women tend be more risk-averse, less overconfident, and more law-abiding than men. As more women reach top management positions, these gender differences have implications for firms’ policies and performance. As Neelie Kroes, then European Competition Commissioner provocatively asked in a speech at the World Economic Forum, “If Lehman Brothers had been Lehman Sisters, would the financial crisis have happened like it did?” (see New York Times, February 1, 2009).

Recent studies in financial economics and accounting find that behavioral attributes of key managers can affect how responsibly firms behave with various stakeholders and their tendency to bend the law (see, e.g., Hutton, Jiang and Kumar (2014), Di Giuli and Kostovetsky (2014), Schrand and Zechman (2012)). Motivated by well-known behavioral differences between men and women executives, in our paper, Do Women Stay out of Trouble? Evidence from Corporate Litigation, which was recently made publicly available on SSRN, we examine whether the presence of women in top management matters for corporate lawsuits.

Lawsuits are clearly a very important concern for corporations. An estimate by John B. Henry in the Metropolitan Corporate Counsel (February 2008, p. 28) suggests that the annual direct litigation cost of Fortune 500 companies was a whopping $210 billion in 2006, i.e., about one-third of their after-tax profits that year. Apart from direct litigation cost, lawsuits also hurt firms’ reputations. Not surprisingly, companies lose significant market values upon the filing of lawsuits against them. Given the substantial impact of litigation, it is rather puzzling that little research has been done to identify the determinants of various types of lawsuits against firms. Our paper aims to fill this gap by examining the relation between the presence of women in top management and the number of lawsuits filed against a firm.

We hand-collect a novel dataset on various types of lawsuits against firms. Importantly, these lawsuits extend beyond securities class actions that most existing papers focus on. Our sample spans the years from 1996 to 2010 and covers firms in the S&P 1500 group in the year 2005. We measure gender diversity as the ratio of women among the top five managers of a firm. We find a negative relation between gender diversity and the number of lawsuits a firm faces. In particular, we estimate that a one standard deviation increase in the proportion of female executives in a firm’s top management team leads to an average decrease of slightly more than one lawsuit per year. This effect is economically significant given that the mean annual number of lawsuits faced by a firm is 2.37. This negative relation holds for most types of lawsuits we analyze, including lawsuits related to product liability, environment, medical liability, labor or pension, contracts, and intellectual property.

The presence of women in the top management of a firm is obviously not a random occurrence. For example, it is possible that women self-select into firms which are less likely targets of litigation. Similarly, firms that face greater litigation risk may avoid putting women in top management positions due to reservations about women’s ability to deal with litigation. Moreover, our empirical specifications predicting lawsuits can have important omitted variables that simultaneously affect both the presence of women in the top management team of a firm and its litigation risk. This endogeneity poses a challenge in establishing a causal relation between the presence of women in top management and lawsuits against firms.

To deal with such endogeneity concerns, we employ instrumental variable techniques. Our first instrument for female representation in the top management team is the proportion of eligible males in a state who were drafted to serve in the Second World War. This instrument is motivated by prior findings that the war drew many women to the workforce permanently due to a decline in the domestic supply of male labor induced by the war. Importantly, the influence of the draft on the female labor supply for the later cohort persisted and varied across the states. Our second instrument is state-level gender equality index, which measures how equal women are to men in economic, political, and legal spheres of life for each of the 50 U.S. states. Results from our instrumental variable techniques point to a causal effect of gender diversity on lawsuits against firms.

We also examine a financial implication of the effect of gender diversity on lawsuits, and find that greater female representation in top management leads to a higher value of cash holdings in firms that are more susceptible to lawsuits. Among firms with high litigation risk, a firm with the mean proportion of women in top management enjoys 7 to 8 cents higher market value per dollar of cash it holds, compared to a firm without female top executives.

Our research contributes to at least two strands of the literature. First, we contribute to the literature on corporate litigation. Scant research examines the underlying causes of corporate litigation, especially lawsuits not related to securities. We help fill this gap by examining the effect of gender diversity on a variety of lawsuits faced by a firm. Second, this study contributes to the growing literature on gender diversity and corporate policies and performance. Overall, our paper sheds light on an important and previously unidentified benefit of the presence of women in the top management team.

The full paper is available for download here.

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