The Impact of Board Gender Composition on Dividend Payouts

Marc Goergen is Professor of Finance at Cardiff Business School and a Research Associate at the European Corporate Governance Institute (ECGI). This post is based on a recent paper by Professor Goergen, Jie Chen, and Woon Sau Leung, both Lecturers in Finance at Cardiff Business School.

Academics have been devoting more and more attention to board gender diversity and its effects over the last two decades. However, most of that literature has a relatively narrow focus as it limits itself to studying the effects of female directors on firm performance and firm value as well as risk taking. Nevertheless, recent literature has adopted a much broader perspective by studying the impact of female directors on various aspects of corporate decision making. This literature tends to concur that female directors and managers have a significant influence on corporate decisions. For example, firms with female directors tend to focus more on corporate social responsibility (CSR) than firms with male directors only. Female directors are also less likely to downsize their workforce. They are also more likely to hire female top executives. Female directors also differ from their male colleagues in other ways: they tend to make fewer acquisitions and for those acquisitions they make they typically offer a lower premium to the target shareholders. They also make less risky financing and investment choices, such as taking out less debt. Finally, companies with female directors have also been found to subject their insider directors to greater pay-performance sensitivity and CEO turnover is also more sensitive to performance.

Importantly, some of the literature also suggests that female directors change behavioral boardroom dynamics. For example, female directors have a better attendance rate at board meetings and, they also improve the attendance rate of their male colleagues. They are also less conformist, and more vocal and activist than male directors. The quality of boardroom discussions of complex decision problems is also significantly improved by the presence of female directors. Such quality improvement in discussions stems from the different and sometimes conflicting points of view that female directors bring into the boardroom. Hence, more diverse boards of directors are less likely to suffer from so called groupthink. Apart from improving boardroom deliberations via an enriched information set, female directors also tend to have a greater focus on the monitoring function of the board. For example, they are more likely to be members of board committees—such as the audit, nomination and corporate governance committee—that relate to monitoring.

While board monitoring is an important governance device to ensure that managers do not waste shareholder funds on perks and empire building, there are other such devices. One such device is dividend policy. Subjecting managers to high dividend payouts will reduce free cash flow within the company, thereby limiting any wastage of shareholder funds. However, while higher dividends reduce the so called agency costs they also increase transaction costs. The increase in transaction costs stems from the company’s greater reliance on external funding, given that internal funds are now much lower and unlikely to be sufficient to sustain the company’s investment activities. This would then suggest that there is an optimal dividend payout, which minimizes the sum of agency costs and transaction costs. A slightly different spin on the governance role of high dividends turns the greater reliance on external funding into a virtue, and not just a source of transaction costs. The argument goes as follows. Each time the company returns to the stock market to raise additional funding, it subjects itself to the scrutiny of potential investors, the financial press, financial analysts, etc. Additional financing will only be provided if the company has performed well in recent years. Hence, managers are under constant pressure to perform well and to pursue shareholder interests.

In our study, The Impact of Board Gender Composition on Dividend Payouts, we combine the greater emphasis of female directors on monitoring with the governance role of dividends. We expect that companies with female directors have higher dividend payouts. We expect this result to hold mainly in companies with weak governance and high governance needs. We find strong support for our hypothesis for a sample of 1,691 companies from the S&P1500 for the period of 1997-2011, amounting to 12,050 firm-year observations. We find a positive and statistically significant relationship between board gender composition and the level of dividend payout. This effect is economically significant as an increase of 10 percentage points in the fraction of female directors is associated with a 1.67 percentage point increase in the firm’s dividend payout (the average dividend payout for our sample is 22.9%).

We qualify companies as having poor governance quality if their management is entrenched, the CEO is also the chairman of the board of directors, the percentage of independent directors is low or product market competition is weak. In addition, we expect that high-technology companies are less reliant on the monitoring role of the board of directors and more reliant on its advisory role whereas the opposite is the case for low-technology companies. Hence, we expect that the latter have higher governance needs than the former. As expected, we only observe the positive impact of the female directors on the dividend payout for companies with weak governance as well as those with high governance needs.

Our study makes an important contribution to the ongoing debate about board gender diversity. It suggests that gender diversity may be more important as well as more desirable in companies with weak governance and high governance needs.

The full paper is available for download here.

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