06 Sep 2021
  • Pattanaporn Chatjuthamard (Sasin School of Management, Chulalongkorn University, Bangkok, Thailand)
  • Pornsit Jiraporn (Pennsylvania State University, University Park, Pennsylvania, USA)
  • Sang Mook Lee (School of Graduate Professional Studies, Pennsylvania State University, University Park, Pennsylvania, USA)
  • Ali Uyar (La Rochelle Business School, Excelia Group, La Rochelle, France)
  • Merve Kilic (Merve Kilic is based at Samsun Üniversitesi, Samsun, Turkey)
This paper looks at whether the threat of takeover strengthens or weakens a company’s board members and if that affects diversity. When it comes to board governance, the two main attributes studied are board size and composition, and this study further adds to the literature by exploring board gender diversity. The paper begins by looking at board gender diversity. It establishes that while the effect of gender diversity on boards is still debated, numerous studies have found female directors are more effective than male counterparts in several ways, such as being more collaborative, more likely to listen to opinions and promoting collaborative thinking. Research has shown that board gender diversity can be beneficial, and numerous countries have enacted regulations to increase female representation on boards. The market for control and the threat of takeover is regarded as an effective external governance mechanism for controlling management. However, there are two competing views regarding the interaction between external and internal governance mechanisms – complementary and substitution. The complementary hypothesis argues that strong external governance mechanisms, like the threat of a takeover, lead to strong internal governance mechanisms, such as the board of directors. The idea is that if board members are worried about their jobs, they will have more incentive to monitor managers and build stronger boards. As board gender diversity enhances board effectiveness, companies can protect themselves by improving diversity. Consequently, this hypothesis predicts that stronger takeover susceptibility leads to higher board gender diversity. The substitution hypothesis argues there is a trade-off between external and internal governance mechanisms. The idea is that the threat of a takeover already keeps managers in line. The threat brings about a better alignment of interests between managers and shareholders by curbing managers’ self-indulgent behavior. Therefore, when the market for corporate control is active, firms do not need strong board governance, and the board tends to be weaker. As it has been established that female directors positively impact the board, the hypothesis predicts that stronger takeover susceptibility leads to lower board gender diversity. The study adopts the takeover index as a proxy for hostile takeover susceptibility as it is less vulnerable to endogeneity (internal factors). While the focus is on board gender diversity, it also uses the two dominant proxies for board quality: size and independence. The study is based on a large sample of over 10,000 observations across 15 years. To mitigate internal influences, several robustness checks were executed, including propensity score matching (PSM), dynamic generalized method of moments (GMM) panel data analysis and instrumental-variable (IV) analysis. All the robustness checks confirmed the results. The results strongly corroborated the substitution hypothesis. It found higher takeover vulnerability leads to larger and less independent boards and, more importantly, to significantly lower board gender diversity. These results are not likely to have been influenced by endogeneity as the proxy for takeover vulnerability is constructed based on exogenous factors (external) beyond the control of any firm. The study adds to the literature in several ways. It is one of the first to use a proxy for takeover vulnerability based on external factors. It also documents robust evidence that the market for corporate control substitutes for board quality, and there appears to be a significant substitution effect. Finally, it adds to the literature on board governance concerning board gender diversity. Prior research has argued and shown that board gender diversity is beneficial, and this study demonstrates that the takeover market results in larger board size, less board independence and, importantly, lower board gender diversity. This implies that board gender diversity constitutes a crucial aspect of board governance – as important as board size and board independence. The study points out that the current board gender diversity ratio is 9.939% which is not high enough and emphasizes the need for more female directors in the board room. The study extends the literature by showing that one of the significant determinants of board gender diversity is the market for corporate control. The paper is published in the Corporate Governance. The full version of this article is available on Emerald Insights.
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