J Bus Ethics

DOI 10.1007/s10551-014-2302-9

The Effects of Women on Corporate Boards on Firm Value,

Financial Performance, and Ethical and Social Compliance
Helena Isidro • Márcia Sobral

Received: 23 July 2013 / Accepted: 19 July 2014

 Springer Science+Business Media Dordrecht 2014

Abstract The European Commission has recently pro- Introduction

posed the introduction of legally binding quotas for women
on corporate boards of European companies. This proposal In these economic difficult times, the case for getting
has put the spotlight on the question of whether increasing more women on company boards has never been
female representation on the board brings economic ben- stronger
efits to the firm. In order to shed light on the issue, this (EU Justice Vice-President Viviane Reding in inter-
study investigates the direct and indirect effects of women view to CNN, 11 February 2011)
on the board on firm value. We use a simultaneous equa-
In November 2012, the European Commission announced
tion model to estimate the effects of women on the board
the intention to introduce a 40 % quota for the under-rep-
on firm value, financial performance, and compliance with
resented gender (women) among non-executive directors of
ethical and social principles adopted by the firm. We find
European firms listed on stock exchanges (European Com-
no evidence that a higher female representation on the
mission 2012a). This proposal has ignited the debate about
board directly affects firm’s value. However, we find
women on the board. While several regulators in Europe,
indirect effects. Women on the board are positively related
including the European Commission, are adopting legal
with financial performance (measured in terms of return on
quotas to put women in directors’ seats, many voices rise
assets and return on sales) and with ethical and social
against the quotas route. Those in favor of the quota regime
compliance, which in turn are positively related with firm
argue that introducing quotas is a way to put an end to a
value. The findings in this study suggest that greater female
damaging and unjustified imbalance (editorial of the news-
representation on corporate boards of large European firms
paper The Independent, 7 May 2013), and to break the glass
can increase firm value indirectly. Further, part of the
ceiling that continues to bar female talent from top positions
indirect effect comes from stronger compliance with ethi-
in Europe’s biggest companies (European Commission
cal principles, something that is not captured by account-
2012a). Those against it claim that a quota system could lead
ing-based financial performance.
to tokenism (Bev Davis, in The Independent 7 May 2013) and
undermine women with the sense that you can not get there
Keywords Board of directors  Corporate governance 
on merit (Helena Morrissey, CEO of Newton Investment
Ethics  Financial performance  Firm value  Gender
Management, in an interview with Bloomberg 24 May
diversity  Social responsibility
2011). Most of the arguments in favor of gender diversity on
boards rely on the idea that greater representation of women
H. Isidro (&) improves firm value. However, academic studies provide
ISCTE IUL Instituto Universitário de Lisboa, BRU-IUL, mixed conclusions regarding the relationship between
Avenida Forças Armadas, 1649-026 Lisbon, Portugal
e-mail: helena.isidro@iscte.pt women on the board and firm value. Some studies find that
firms with gender-diverse boards perform better due to the
M. Sobral unique pool of resources and human capital that women
Deloitte, Lisbon, Portugal bring to the business (Campbell and Mı́nguez-Vera 2008;
e-mail: marcia_sobral@hotmail.com

123

Erhardt et al. 2003), whereas other studies find the opposite
effect (Bohren and Strom 2010; Adams and Ferreira 2009),
and still others find no valuation consequences (Carter et al.
2010; Rose 2007).
This study contributes to the debate on whether
appointing women to board positions has positive valuation
effects. Differently from other studies, we model the direct
but also the indirect effect of women on the board on firm
value. We suggest that the indirect valuation effects arise
from improvements in financial performance and from
improvements in non-financial aspects of the business.
Specifically, we focus on the firm’s compliance with eth-
ical and social principles, which is known to positively
affect firm value (Rodgers et al. 2013; Jo and Harjoto 2011;
Donker et al. 2008). We apply a simultaneous estimation
model to obtain the direct and indirect valuation effects.
We estimate these effects for the period 2010–2012 and for
a set of large European firms in 16 countries representing
the firms that will soon apply the European regulation on
quotas for women on boards.
To the best of our knowledge, this is the only study
investigating the business outcomes of gender-diverse
boards in an international setting. We document variation
in measures taken by European countries to mitigate gen-
der imbalance on corporate boards. We find great cross-
country variation in the type of measures adopted by
European countries and large variation in corporate prac-
tices. Nordic firms exhibit higher female representation on
the board, while South European firms have lower repre-
sentation. The results also indicate that women’s repre-
sentation on corporate boards has increased over time. The
simultaneous estimation results show that the presence of
women on the board of European firms does not directly
affect firm value (measured as Tobin’s Q), but we find that
women on the board has a positive effect on financial
performance [measured as return on assets (ROA) and
return on sales (ROS)] and on the firm’s compliance with
ethical and social standards. More importantly, we find that
the positive impact of women on the board on financial
performance, and on ethical and social compliance, indi-
rectly affects firm value. Overall, the empirical findings
suggest that greater female representation on the board can
enhance firm value through better financial performance
and through greater ethical and social compliance.
Our findings have useful insights for policymakers.
Imposing legally binding quotas for women on corporate
boards has costs of implementation and enforcement. It is
therefore important for European policymakers to under-
stand whether the costs are counterbalanced by financial
and non-financial benefits, and how those benefits can
affect the value of the business. Our conclusions are also
relevant to prospective investors who wish to consider
gender diversity in their investment decisions.
123
H. Isidro and M. Sobral
The European Context
There is considerable variation across Europe regarding
measures to promote board gender diversity. Some coun-
tries have enforced mandatory quotas, while others have
chosen voluntary measures, and in still other countries
regulators simply regard the matter as a private business
decision. Appendix Table 6 provides a summary of the
measures in each country. In one extreme is Norway,
where mandatory 40 % quotas for women on the boards
have been in place since 2006.1 Norway was the first
country in the world to set mandatory gender targets for
corporate boards. The rule is mandatory for listed firms,
state-owned companies, and other companies, and is
enforced by the courts. In an extreme situation, the court
may dissolve a firm if it does not comply with the rule.
Other European regulators have recently followed the
example of Norway. Belgium introduced legislation in
2011 calling for at least one-third of the board members of
publicly-listed companies and state-owned companies to be
of the under-represented gender. The rule will be fully
applicable in 2019. France adopted legislation in 2011
imposing a minimum of 20 % of the board seats for each
gender by 2014 and of 40 % by 2017. The French legis-
lation anticipates that non-compliant firms will face nulli-
fication of their board elections and suspension of
directors’ benefits, but the board decisions are not can-
celed. Italy has also passed a law imposing at least one-
third representation of each gender among board members
to be reached by 2015. The law provides sanctions for non-
compliant companies.
The Netherlands and Spain have adopted legislation to
ensure gender diversity on the board, but there are no
sanctions for firms that fail to comply. In the Netherlands,
the minimum quota for women on the boards is 30 %. The
country adopts a ‘comply or explain’ approach but does not
impose non-compliance sanctions. In Spain, the regulator
encourages a gradual increase up to 40 % by 2015. Leg-
islation and administrative ruling of various types are also
in place in Denmark, Finland, and Greece.2
The United Kingdom prefers a voluntary approach.
Gender diversity on corporate boards is expected to be
achieved through voluntary initiatives and good practice.
Examples are: the mentoring program ‘FTSE 100 Cross-
Company Mentoring Scheme’ designed to support board
membership of senior female managers; and the ‘30 %
Club,’ a voluntary code, was endorsed by several well-
1
The relevant law was adopted in 2003, and the measures were made
obligatory as of 1 January 2006.
2
For more details on countries’ mandatory and voluntary initiatives
see European Commission progress report (European Commission
2012b).
Effects of Women on Corporate Boards
known UK companies. Germany is currently considering
introducing legal measures, but the subject has generated
intense controversy among companies and politicians.
Recognizing that the fragmented actions followed across
Europe have done little to correct the gender imbalance on
corporate boards, and the European Commission proposes
to introduce regulation. The objective of the proposal was
to attain a 40 % presence of the under-represented gender
among non-executive directors of firms listed on the
European stock exchanges by 2020. Firms falling short of
that target are recommended to make appointments on the
basis of a comparative analysis of the qualifications of
each candidate, by applying clear, gender-neutral, and
unambiguous criteria (European Commission 2012a).
Theories on the Relationship Between Women
on the Board and Firm Value
Arguments in favor of a stronger presence of women on
corporate boards typically emphasize two types of benefits:
ethical and economic. One stream of argument derives
from the idea of equal opportunity and equal representation
of individuals in society. It is argued that it is morally
wrong to exclude individuals from the business world
purely on the grounds of gender. Firms are responsible for
the ethical treatment of individuals (van der Walt and
Ingley 2003), and the under-representation of minority
groups of society on corporate boards gives rise to ethical
considerations (Burke 2000; Singh et al. 2001). For
example, the European Commission often argues that the
equality between women and men is a fundamental right in
itself and a European common principle (European Com-
mission 2009). Another stream of argument invokes the
economic benefits of gender diversity in organizations. The
idea is that gender discrimination is economically sub-
optimal rather than immoral. If the firm fails to select
valuable individuals, it will forgo access to resources that
are relevant to the firm (Burke 2000; Westphal and Milton
2000). Because women bring unique and valuable skills to
the board, board performance improves which positively
impacts firm value (Huse et al. 2009; Campbell and Mı́n-
guez-Vera 2008; Hillman and Dalziel 2003). Next, we
review the most common theories used to support the view
that gender diversity on the board has economic benefits
for the business.
Agency Theory
The separation of ownership and control in the modern firm
presented by Bearle and Means (1932) is the essence of the
agency theory. The theory takes a contractual view of the
firm: shareholders and managers sign a contract specifying
how managers should use shareholders’ funds, and how the
returns are divided between them (Jensen and Meckling
1976). But because contracts are incomplete the manager
ends up with substantial residual control rights. The board
of directors plays the critical function of monitoring man-
agers to avoid excessive management residual rights (Fama
and Jensen 1983). Effective board monitoring can reduce
misallocation of funds, thereby improving shareholder
value. The positive impact of effective board monitoring
on firm value has been largely documented in the academic
literature (for a review see, for example, Gillan 2006). If
the presence of women improves board monitoring, then
the agency framework offers the possibility that female
representation on the board of directors is associated with
firm value.
Hillman and Dalziel (2003) argue that the board needs a
variety of skills, information, and experiences to exercise
effective monitoring. Empirical research has found sup-
portive evidence of a positive effect of women on board
monitoring. Adams and Ferreira (2009) show that boards
with more female directors allocate more effort to moni-
toring functions. Female directors have better attendance
records than their male peers, which influences in a posi-
tive way male attendance. Carter et al. (2003) suggest that
gender diversity increases board independence, which is
known to improve monitoring.
Resource Dependence Theory
According to the agency theory, the essential role of the
board is monitoring. The resource dependence theory
suggests that boards have the important function of facili-
tating access to resources that are vital for the success of
the firm (Pfeffer and Salancik 1978). The board’s primary
functions are: (a) provision of advice and counsel, (b) cre-
ation of legitimacy for the firm in the external environment,
(c) creation of channels of communication between the
firm and external entities, and (d) preferential access to
commitments or support from important elements outside
the firm. To maximize the performance of these functions,
Hillman et al. (2000) suggest that boards should include a
diversity of directors, namely: insiders, business experts,
support specialists, and influential community members.
They argue that a diverse board brings more resources to
the firm, which will result in better firm performance and
value. Firms with more diverse board members have more
access to resources that help to reduce external depen-
dency, diminish uncertainty, and improve reputation, all of
which lead to increased firm value (Hillman and Dalziel
2003). Kim et al. (2009) suggest that board diversity
improves the breadth and speed of top management team
strategic action capability. Consistent with the diversity
argument, Hillman and Dalziel (2003) find that female
123

directors in top US firms bring diverse skills and experi-
ence to the boardroom. They conclude that female and
African-American directors have less business background
but have more advanced degrees and join multiple boards
at a faster rate than do white male directors. In addition to
information and links to the external environment, having
female directors enhances the firm’s external legitimacy
because it signals that the firm promotes gender equality
and considers the importance of women in the labor and
product markets, something that is reflected in firm value.
Bilimoria (2000) argues that having a gender-diverse board
signals that the firm values the success of its female
employees.
Human Capital Theory
This theory examines how the individual’s stock of
knowledge and skills can benefit the organization (Becker
1964). As women traditionally have less education and
work experience than men, board selectors (which are often
male) assume that women lack sufficient human capital to
serve as board members (Burke 2000). But empirical evi-
dence does not corroborate this argument. Singh et al.
(2008) study UK boards and find that female directors
bring more international experience to the board and are
more likely to have an MBA. While male directors have
more board experience in general, female directors have
more experience on boards of smaller firms. Peterson and
Philpot (2007) examine US firms and find that female and
male directors are equally qualified. The authors also show
that female directors and male directors classified as
business experts or support specialists according to Hill-
man’s et al. (2000), are equality represented on the board.
Peterson et al. (2007) find that African-American directors
assume different roles on the board relative to Caucasian
directors, and that this is a consequence of their unique
human capital. Overall, the evidence suggests that women
and men are equally qualified for board functions, and that
women bring a valuable pool of capital to the board. The
human capital theory predicts that the performance of the
board will be affected by board diversity as a result of the
diverse and unique human capital that each individual has,
and that the improvement in board performance is likely to
positively affect firm value.
Social Psychology Theory
Social psychology recognizes that the status and impact of
minority groups depend on the social context and group
dynamics. That is, diversity on the board may have positive
or negative effects depending on the dynamics of the board
(Westphal and Milton 2000). Some evidence suggests that
123
H. Isidro and M. Sobral
minority board members, such as female directors, stimu-
late divergent thinking and motivate other board members
to consider a wider range of potential solutions (Moscovici
and Faucheux 1972; Nemeth 1986). But the social psy-
chology perspective also predicts that members from the
majority group can exert excessive influence on decision-
making and often resist the influence of minority members
(Tanford and Penrod 1984). For example, Tsui et al. (1992)
find that gender and race diversity are associated with
lower group commitment and higher absence. Earley and
Mosakowski (2000) argue that groups with more minority
members communicate less because they do not share
common ideas. Williams and O’Reilly (1998) suggest that
members of heterogeneous groups cooperate less and
experience more emotional conflicts. These arguments
suggest that the presence of minority female directors on
the board makes board decision-making more time con-
suming and less effective with potentially negative conse-
quences on firm value. Overall, social psychology theory
suggests that women on the board may affect firm value
positively or negatively, depending on the board dynamics.
For example, Westphal and Milton (2000) conclude that
minority directors have more influence on board decisions
than majority directors, but only if they had minority
experience on other boards or if they had strong social
connections with majority directors.
Hypotheses Development
There has been an increasing demand for a stronger pre-
sence of women on corporate boards from regulators
(European Commission 2012a), investors (Ellis and Keys
2003), the media (The Independent, 7 May 2013), business
organizations (Catalyst 2011a), and society in general
(Campaign ‘2020 Women on Boards’). Although both
ethical and economic arguments have been advanced in
favor of more board directorships for women, it is usually
said that firms will appoint more women to their boards
only if doing so results in economic benefits for the firm
(i.e., the business case argument). For that reason, a bulk of
academic research investigates the economic outcomes for
firms that have female directors on their boards. The main
argument for proposing a positive association between
women on corporate boards and firm value is that women
improve board efficiency and bring distinctive resources to
the firms, factors that enhance firm value.
In the modern firm, the board of directors has two
important functions: monitoring and provision of access to
resources (Hillman and Dalziel 2003). If the presence of
women on the board enhances the fulfillment of these
functions, then it is possible that appointment of women to
the board increases firm value. Improvement in board
Effects of Women on Corporate Boards
monitoring is expected because: (a) the unique human
capital of women brings diversity of skills and experiences
to the board (Terjesen et al. 2009; Hillman and Dalziel
2003; Bilimoria 2000); (b) women improve decision-
making and leadership style (Rosener 1990); (c) women
increase board independence (Carter et al. 2003); and
(d) women promote better boardroom behavior (Clarke
2005). Consistent with the view that women increase board
monitoring effectiveness, Adams and Ferreira (2009) find
that boards with female directors have better attendance
records, and Huse et al. (2009) show that women on boards
have a positive influence on board controlling tasks. The
presence of women on the board has also been associated
with boards being better equipped to deal with the resource
dependency of the firm. Women provide creative-thinking
and new ideas (Huse et al. 2009; Huse and Solberg 2006);
they dedicate more attention to qualitative issues such as
social responsibility and philanthropy (Hafsi and Turgut
2013; Bear et al. 2010; Williams 2003); they have a
stronger perception of business ethics (McCabe et al.
2006); they represent one important part of the pool of
human capital in the labor and product markets (Bilimoria
and Wheeler 2000; Mattis 2000); women provide mentor-
ing and networking for other women in the firm (Bilimoria
2000); and they improve external legitimacy and reputation
(Bilimoria 2006; Daily and Dalton 2003). These benefits
have been extensively invoked by policy-makers, aca-
demics, and practitioners to argue that women on boards
have positive valuation effects (European Commission
2012a, b; Catalyst 2011a).
Although the theories presented in the previous section
do not directly predict a positive relationship between
women on the board and firm value, they provide insights
about the potential benefits that women bring to the firm.
Consistent with this idea, several empirical studies find
evidence that the presence of women on the board has
positive effects on firm value and financial performance.
Erhardt et al. (2003) find a positive relationship between
the percentage of female directors in large U.S. firms and
financial measures of performance (ROA, and return on
investment). Carter et al. (2003) study Fortune 1000 firms
and conclude that the presence of women on the board is
positively associated with firm value. Likewise, Campbell
and Mı́nguez-Vera (2008) show that a higher proportion of
women on the boards of Spanish firms increases firm value.
Ellis and Keys (2003) and Francoeur et al. (2008) find that
a higher proportion of women on the board and on top
management teams experiences positive abnormal returns.
Gul et al. (2011) show that stock prices reflect more firm-
specific information in firms with more gender-diverse
boards, a finding that is consistent with women on boards
conveying value to shareholders.
However, some empirical studies find no link between
women on the board and firm value, and others even find a
negative relationship. Zahra and Stanton (1988) find no
association between the percentage of female directors of
US firms and ROA, profit margin, sales to equity, earnings
per share, and dividends. Rose (2007) studies Danish firms
and concludes that there is no evidence that female rep-
resentation on the board improves firm value. Carter et al.
(2010) report similar findings for US firms. A possible
explanation for the absence of results is that women are
appointed to the board as a token (Kanter 1977) or because
it is morally desirable, but women appointments render no
economic effects. Kochan et al. (2003), who find no
implications of having female directors for business per-
formance, suggest studying other effects beyond those of
financial performance.
Other studies claim that the appointment of more female
directors diminishes firm value. Adams and Ferreira (2009)
find that despite the improved board effectiveness of US
companies, the presence of women negatively affects firm
value. Their interpretation is that gender-diverse boards
become excessively tough monitors, which has negative
consequences on value. Bohren and Strom (2010) report
similar results for Norwegian firms and conclude that
heterogeneity on the board impairs decision-making and
board effectiveness. Smith et al. (2006) and Shrader et al.
(1997) also document a negative relationship between
women on the board and firm value. These results are
consistent with the social psychology argument that the
presence of minorities on the board results in poor com-
munication and cooperation (Earley and Mosakowski
2000).
There are other possible reasons for the apparent con-
flicting results of the empirical studies, however. One is the
assumption that women on the board directly affect firm
value, and the other is the assumption that any valuation
effect is captured by accounting-based financial measures.
In fact, several studies use accounting-based financial
performance measures, such as ROA, ROI (return on
investment), and ROS and firm value measures such as
Tobin’s Q interchangeably. An example is Carter et al.
(2010), who find that the number of women on the board is
positively related with ROA but not with Tobin’s Q. Based
on these findings, they conclude that there is no association
with firm performance. Adams and Ferreira (2009) use
Tobin’s Q and ROA as proxies for both financial perfor-
mance and firm value and conclude that women on the
board have negative valuation effects. But in fact, their
empirical results are mixed. In some cases, the gender
variable is positively associated with the measures, and in
other cases, it is not significantly associated. Another
method is followed by Campbell and Mı́nguez-Vera
123

(2008). These authors use the financial performance mea-
sure (ROA) as a determinant of firm value measured by
Tobin’s Q. Overall, the different ways of capturing firm
value and firm financial performance, and the expectation
that women on the board directly affects both, may explain
the mixed results.
We propose that female representation on the board has
direct and indirect effects on firm value. Additionally, we
posit that if board gender diversity affects firm value
(measured by Tobin’s Q), and that effect may or may not
be captured by financial measures of performance (e.g.,
ROA, ROS). Women on the board may influence firm
value through other aspects of the business, namely qual-
itative improvements in the business that are not reflected
in financial statement measures. Financial measures cap-
ture effects such as increase in sales, better profit margins,
more efficient investment of assets, but they do not reflect
qualitative benefits that women bring to the board, such as
the firm’s compliance with ethical and social standards.
The firm’s compliance with ethical and social standards has
positive implications for firm value.
Rodgers et al. (2013) and Jo and Harjoto (2011) show
that a firm’s engagement with high standards of social
responsibility increases firm value. Donker et al. (2008)
find that engagement with ethical principles positively
affects firm value. Further, there is evidence that the pre-
sence of women increases social and ethical involvement.
Hafsi and Turgut (2013) and Bear et al. (2010) report
improvements in corporate social responsibility with an
increase of women’s representation on the board. The
authors suggest that women’s greater sensitivity to social
issues contributes to enhanced corporate social responsi-
bility. Firms with more gender-diversified leadership are
also more involved in philanthropy and social responsi-
bility initiatives (Williams 2003; Catalyst 2011b), and that
these are perceived by stakeholders as value-creating
activities (Catalyst 2011b). Labelle et al. (2010) propose
and test a framework incorporating board diversity and
ethical behavior. They conclude that firms that promote a
corporate diversity policy at the top management level
develop organizational culture and ethical values, resulting
in stronger compliance with ethical principles (in their case
less earnings management). Diversity in top management
teams and on the board creates a sense of satisfaction and
fairness in the workplace, which gives individuals the
motivation to act in the firm’s best interests and avoid
unethical practices that would risk the firm’s success. In
line with this idea, McCabe et al. (2006) find some evi-
dence that men perceive bribery in the workplace as more
ethical than do woman.
Firm value is commonly measured in the business
literature by Tobin’s Q (e.g., Greene and Jame 2013;
Adams and Ferreira 2009; Campbell and Mı́nguez-Vera
123
H. Isidro and M. Sobral
2008; Lang et al. 2003; Demsetz and Villalonga 2001).
Tobin’s Q represents the market expectations about the
ability of the firm to generate future cash flows and its
associated risk, while accounting-based financial mea-
sures are based on past events and only on those
reflected in accounting. Hence, Tobin’s Q reflects
investors’ expectations about all aspects of the business
including financial performance captured by accounting,
but it goes beyond that. We hypothesize that Tobin’s Q
reflects both the financial and non-financial effects of the
presence of women on the board, particularly those
related to social and ethical issues. We develop and test
a model in which the potential positive effect of female
directors on firm value can occur directly or indirectly.
The indirect effect can result from better financial per-
formance or from stronger compliance with ethical and
social standards. Accordingly, we define the hypotheses
as follows:
H1 Having women on the board of directors has a posi-
tive direct effect on the value of the firm.
H2 Having women on the board of directors has a posi-
tive indirect effect on the value of the firm, through a
positive effect on financial performance.
H3 Having women on the board of directors has a posi-
tive indirect effect on the value of the firm, through a
positive effect on compliance with ethical and social
standards.
Methodology, Variables, and Sample
Model
Our aim is to investigate the direct and indirect effects of
women on corporate boards on firm value. We consider
that the effects can be driven by financial performance
and/or by compliance with ethical and social standards.
Figure 1 maps out the links between the variables of
interest. The link in the center represents the direct effect
of women on the board on the firm’s value. The left-side
link represents the valuation effect embedded in
accounting measures of financial performance. The right-
side link represents the valuation effect captured by non-
financial traits, namely the firm’s compliance with ethical
and social principles. To estimate the direct and indirect
effects, we use a simultaneous equation model proposed
by Zellner and Henri (1962) that allows for exogenous
and endogenous variables and for cross-equation error
correlation.
Formally, we estimate the simultaneous equations
model as follows:
Effects of Women on Corporate Boards
Firm
value
Financial Ethical and social
performance compliance
Women on
the board
Fig. 1 The links between women on board and firm value
Firm value ¼ a0 þ a1 Women on board
þ a2 Financial performance
þ a3 Ethical and social compliance
þ a4 Governance quality
þ a5 Size þ a6 Leverage þ a7 Growth
þ a8 Age þ Ra9 Country
þ Ra10 Industry þ e
Financial performance ¼ b0 þ b1 Women on board
þ b2 Ethical and social
compliance þ b3 Governance
quality þ b4 Size þ b5 Leverage
þ b6 Growth þ b7 Age
þ Rb8 Country þ l
Ethical and social compliance ¼ q0 þ q1 Women on board
þ q2 Governance quality
þ q3 Board size
þ Rq4 Country þ u:
The simultaneous estimation of the three structural
equations is superior to a least squares estimation of the
individual equations because it accounts for the interde-
pendency between firm value, financial performance, and
ethics and social responsibility. As in other valuation
studies, the endogeneity problem due to omitted variables
can affect our results. The simultaneous estimation model
addresses the problem by modeling the decision to appoint
women to the board of directors as an endogenous firm
decision. The model also accounts for the endogeneity of
firm performance and the decision to have a separate ethics
and social responsibility committee. Defining these two
decisions in terms of firm-specific conditions is a way to
mitigate the omitted variables problem. To assess the
adequacy of the simultaneous estimation model, we test the
null hypothesis of no systematic difference between the
estimated coefficients of the simultaneous model and those
of the OLS model (Hausman test), and we reject the null at
the 1 % level. Besides dealing with the endogeneity
problem, the simultaneous estimation model also deals
with the correlation between the error terms of the equa-
tions in the system, which is not considered in the least
squares estimation.3
Reverse causality is also a concern in valuation mod-
els. To address that concern, we use the lag of women on
board. In this way, the key independent variable is fixed
in calendar time before the dependent variables firm value
and performance. For the reasons explained in the next
section, we also use the contemporaneous women on
board in the first equation of the model as a robustness
check.
Variables
ð1Þ
The variables are defined as follows:
Firm value is measured as Tobin’s Q defined as of the
sum of the market value of equity (share price multiplied
by the number of ordinary shares in issue at fiscal year-end)
and the book value of debt divided by the book value of
total assets. Tobin’s Q has been extensively used in eco-
nomics as a proxy for firm value (e.g., Greene and Jame,
2013; Carter et al. 2010; Adams and Ferreira 2009;
Campbell and Mı́nguez-Vera 2008; Lang et al. 2003;
Demsetz and Villalonga 2001).
Women on board is measured in two ways: (i) the pro-
ð2Þ portion of female directors and (ii) an indicator variable
coded 1 if there are at least 30 % of female directors on the
board and 0 otherwise. The proportion of women on the
board is a commonly used measure in the literature (e.g.,
Hafsi and Turgut 2013; Adams and Ferreira 2009; Camp-
bell and Mı́nguez-Vera 2008). The second measure origi-
nates in the critical mass theory. This theory states that a
ð3Þ
sufficient number of adopters of an innovation in a social
system is necessary in order for the rate of adoption to
become self-sustaining and create further growth (Kanter
1977). Drawing on critical mass theory, Torchia et al.
(2011) show that a critical mass of three or more women is
the minimum needed to cause a fundamental change in the
boardroom. We do not use the ‘three or more female
directors’ indicator proposed by Torchia et al. (2011)
because board size in our sample varies considerably, and
thus the influence of three women or more on a board of
four members (the minimum value) can be very different
3
We verify that the correlation between the error terms of the
equations is high. For the model that uses ‘proportion of women on
board’ the correlations between the error terms of the equations are
Eq1/Eq2 = 0.460, Eq1/Eq3 = -0.848, Eq2/Eq3 = -0.608. For the
model that uses ‘30 % or more women on board,’ the correlations
between the error terms of the equations are Eq1/Eq2 = 0.393, Eq1/
Eq3 = -0.435, Eq2/Eq3 = -0.485.
123

from their influence on a board of 42 members (the max-
imum value). Instead, we use the related indicator ‘at least
30 % of female directors’ on the board.
We regress the dependent variables on the lagged women
on board variables. This is done to address causality concerns
and because the potential effects of having female directors
are not likely to occur immediately. In the findings section,
we test the sensitivity of the results to this assumption.
Financial performance is measured by two accounting-
based ratios: (i) ROA, defined as net income before
extraordinary items divided by total assets, and (ii) ROS,
defined as operating profit divided by sales.
Ethical and social compliance is measured as an indicator
variable coded 1 if the firm has a separate committee for
ethics or social responsibility issues and 0 otherwise. Our
argument is that the existence of a dedicated committee
indicates that the firm and its board of directors have
mechanisms to ensure compliance with the ethical and social
standards endorsed by the firm.4 Most firms adopt a set of
good ethical and social principles that are usually embodied
in codes of ethics and policies of conduct. Because the
central function of the ethics and social responsibility com-
mittee is to monitor the adherence to the adopted standards,
we believe that the existence of the committee represents the
firm’s compliance with ethical and social standards. Agency
theory predicts that increased monitoring results in better
corporate behavior. As the existence of a separate ethics and
social responsibility committee represents additional moni-
toring of ethical and social principles, we expect firms with
that committee to have higher ethical and social compliance
with the standards.
According to Purcell (1982), one of the main functions
of the ethics committee is to implement the code of ethics
and to support its interpretation. Other functions include
holding management responsible for its stewardship of the
business and helping the firm’s external legitimacy. These
monitoring functions are typically expressed in the mission
statement of the committees. For example, Rolls-Royce
describes the mission of the ethics committee in its 2012
annual report as follows: It is responsible for reviewing
compliance with the Group’s Global Code of Business
Ethics, for establishing bribery prevention policies and for
reviewing arrangements by which staff may raise concerns
about improprieties in confidence…. The functions of the
social responsibility committee of Iberola is: …Periodi-
cally review the Social Responsibility Policies and propose
the amendment and update thereof to the Board of Direc-
tors; review and analyse the expectations of stakeholders
and ensure that they are taken into account in formulating
4 of years of the firm. Like humans, firms can lose their
Because the existence of an ethics and social responsibility
committee is self-determined, it is important to treat the variable as
an endogenous one. The simultaneous equation model does that.
123
H. Isidro and M. Sobral
Social Responsibility Policies; …Supervise the Company’s
actions relating to corporate social responsibility and
sustainability and report thereon to the Board of Directors
and to the Executive Committee, as appropriate…
These examples show that the ethics and social
responsibility committee represent a monitoring mecha-
nism over the ethical and social norms adopted by the firm.
Governance quality captures the overall governance
quality of the firm. It is important to account for the firm-
level governance quality because the presence of women on
the board may be related with governance quality. That is,
we look for the effects of women on the board, which are
beyond the governance effect. Unlike earlier studies that do
not control for the firm’s overall governance quality, we
account for governance quality using Aggarwal et al.’s
(2011) index. The index combines 41 governance attributes
in four categories: board (24 attributes), audit (3 attributes),
anti-takeover provisions (6 attributes), and compensation
and ownership (8 attributes). The authors assign the value of
one to a governance attribute if the firm meets the standards
on that attribute and zero otherwise. The index represents
the percentage of attributes that the firm meets. Firms with
higher values of the index have better governance quality. It
is important to note that the governance index does not
include any attribute related to female directors, and as a
result, there is no concern for multicollinearity between the
‘governance quality’ and ‘women on board’ variables.
Control variables We also include the following control
variables.
Size is defined as the natural logarithm of total assets.
Firm size is a typical determinant of firm value and firm
performance. It is also associated with higher costs of
monitoring as larger firms are more complex and have
more arm’s length transactions. In line with earlier studies,
we expect a negative association between size and firm
value/firm performance (Carter et al. 2010; Bohren and
Strom 2010; Adams and Ferreira 2009; Campbell and
Mı́nguez-Vera 2008; Rose 2007).
Leverage is the ratio of long-term debt to total assets.
Debt is an important mechanism to force managers to
generate cash flows to pay interest and the principal,
thereby mitigating agency conflicts created by free cash
flows (Shleifer and Vishny 1997). Hence, we expect
leverage to be negatively related with firm value and firm
performance (Campbell and Mı́nguez-Vera 2008).
Growth is the mean of sales growth in the last three years.
Operational growth is another important firm fundamental
(Greene and Jame 2013; Lang et al. 2003). We expect growth
to be positively associated with firm value and performance.
Age is measured as the natural logarithm of the number
ability to compete and to innovate over time. Firm aging is
often associated with organizational rigidity and rent-
Effects of Women on Corporate Boards
seeking behavior by managers, both of which threaten firm
value. However, age can bring knowledge, skills, and
specialization. Consistent with the first hypothesis, Loderer
and Waelchli (2009) and Greene and Jame (2013) show
that firm value and firm performance decline with firm age.
Thus, we expect a negative relationship between firm age
and firm value/performance.
Board size is the natural logarithm of the number of
board members and is used in Eq. (3) as a size variable. We
anticipate that firms with larger boards are more likely to
have a separate ethics or social responsibility committee.
Country refers to three country-level indicator variables
that characterize the country’s legislation regarding gender
diversity in corporate boards. In this way, we take advan-
tage of our international sample and account for cross-
country variation in gender diversity legislation. In
Appendix Table 6, we show that there are three types of
approach in terms of board gender diversity: (1) countries
that have issued legislation accompanied with sanctions for
firms that do not comply; (2) countries that have legisla-
tion, but no sanctions are in place for non-compliance; and
(3) countries where there are only voluntary initiatives.
This classification yields three country indicators, and we
therefore run the empirical analysis excluding the first
indicator. The two indicator variables included in the
empirical tests are named Country_legislation_nosanctions
and Country_voluntary_initiatives. The classification of
countries into the three groups is shown in Table 1 Panel C.
The estimated coefficients of the two country indicator
variables represent the difference in firm performance, firm
value, and likelihood of a firm having ethics and social
responsibility committee across the three types of coun-
tries. It is difficult to predict in which type of country these
characteristics are expected to be higher. For that reason
we make no predictions regarding the estimated coeffi-
cients of the country indicators.
Industry indicators. We add to Eq. (1) industry indicator
variables based on one-digit standard industrial classifica-
tion (SIC) to account for cross-industry omitted factors
affecting the results.
Sample
Our initial sample consists of firms included in the Financial
Times 2011 classification of the 500 largest European firms.
We obtain the financial and market data from Thomson
Reuters Datastream.5 Data for women on boards, total board
members and ethics and social responsibility committees are
5
The sample firms are large firms that report under IFRS. Only five
of the Swiss firms do not report under IFRS, but exclusion of these
firms does not change the results. All the financial data are in Euros.
In countries that do not use the Euro, financial data are converted to
Euros using the exchange rate at fiscal year date.
collected from BoardEx supplemented with hand-collected
data. The governance index is from the Aggarwal et al.
(2011) database. After eliminating observations with miss-
ing data, our final sample comprises 922 observations rep-
resenting 16 countries and three years (2010 to 2012). Our
sample represents a group of economically important
European firms and a recent time period. The firms in the
sample represent the pool of firms that will soon need to
apply the European regulation on quotas for women on the
board of directors. This makes our study relevant in the
European setting.
Findings
Descriptive Analysis
Table 1 Panel A reports descriptive statistics for women on
corporate boards across European countries. On average,
14 % of the board members of the largest European firms
in the sample are women. This figure confirms that women
are still a minority on the board of European firms. Not
surprisingly, the highest proportion of female directors is
seen in Norway, where a mandatory 40 % quota for women
is in place. It is also worth mentioning that the minimum
proportion in Norway is a high 0.222. Another Nordic
country, Finland, has the second highest proportion of
women on corporate boards. At the other extreme, Portugal
and Ireland have the lowest proportion of female directors.
In all countries except the Nordic ones (Norway, Finland,
Denmark, and Sweden) and France, the minimum propor-
tion of women on the board is zero, which suggests that
women do not reach the boardroom in many European
companies. Our descriptive evidence is consistent with the
results presented in the European Commission progress
report (European Commission 2012b), in which Nordic
countries score the highest, and Southern and Eastern
countries score the lowest in terms of women representa-
tion on corporate boards. The last column of Table 1 Panel
A reports the frequency of firms with a critical mass of
women on the board (30 % or more women on the board).
Once again, Norway has the highest value. Female direc-
tors have 30 % or more of the board seats in 85.7 % of the
large Norwegian firms. Other countries with a high pro-
portion of ‘30 % or more female directors’ are Finland and
Sweden. In contrast, in Austria, Belgium, Greece, Ireland,
Italy, and Portugal, there are no cases of firms with 30 % or
more female directors.
Panel B of Table 1 reports the mean of gender diversity
variables by year. The proportion of women on boards of
large European firms and the frequency of firms with 30 %
or more women on the board have increased over time. For
example, the number of firms with more than one-third of
123
 H. Isidro and M. Sobral

Table 1 Descriptive statistics on women on the board of large European firms

Country N Proportion of women on the board Frequency of firms with 30 % or
more women on the board
Mean Median Std. dev. Min Max

Panel A: Descriptive statistics by country

Austria 18 0.112 0.103 0.085 0.000 0.240 0.000
Belgium 30 0.084 0.083 0.064 0.000 0.200 0.000
Denmark 33 0.160 0.167 0.068 0.000 0.333 0.030
Finland 29 0.241 0.222 0.095 0.100 0.500 0.207
France 177 0.153 0.154 0.096 0.000 0.400 0.079
Germany 120 0.099 0.095 0.074 0.000 0.318 0.008
Greece 11 0.090 0.091 0.101 0.000 0.300 0.091
Ireland 9 0.048 0.000 0.065 0.000 0.167 0.000
Italy 60 0.059 0.049 0.065 0.000 0.250 0.000
Netherlands 49 0.137 0.143 0.095 0.000 0.400 0.041
Norway 21 0.372 0.385 0.070 0.222 0.529 0.857
Portugal 15 0.025 0.033 0.023 0.000 0.077 0.000
Spain 54 0.107 0.080 0.077 0.000 0.308 0.019
Sweden 69 0.248 0.250 0.113 0.063 0.583 0.290
Switzerland 83 0.119 0.125 0.079 0.000 0.333 0.012
United Kingdom 214 0.143 0.133 0.089 0.000 0.429 0.056
All countries 992 0.140 0.125 0.104 0.000 0.583 0.078
Year N Proportion of women on the board Frequency of firms with 30 % or
more women on the board

Panel B: Means values of gender diversity measures by year

2010 326 0.113 0.049
2011 332 0.128 0.066
2012 334 0.178 0.117
All years 992 0.140 0.078

Country groups Countries N 2010 2011 2012 All years

Panel C: Means values of proportion of women on the board by groups of countries

[1] Legislation with sanctions Belgium, France, Italy, Norway 288 0.097 0.125 0.205 0.142
[2] Legislation but no sanctions Austria, Denmark, Finland, Greece, Netherlands, 209 0.118 0.128 0.157 0.135
Portugal, Spain
[3] Voluntary initiatives Germany, Ireland, Sweden, Switzerland, UK 495 0.121 0.130 0.171 0.141
All countries 0.113 0.128 0.178 0.140
Test [1] - [2] = 0 (p value) 0.473 0.995 0.004 0.712
Test [1] - [3] = 0 (p value) 0.077 0.965 0.003 0.982
Test [2] - [3] = 0 (p value) 0.995 0.999 0.647 0.748

Industry N Proportion of women on the board 30 % or more women on the board

Panel D: Means values of gender diversity measures by industry groups

Agriculture and natural resources 86 0.108 0.081
Basic fabrication 171 0.167 0.111
Manufacturing 240 0.131 0.075
Transportation, electronics & communication 153 0.131 0.059
Retail 68 0.156 0.103
Financial and real estate services 210 0.142 0.048
Entertainment and business services 40 0.170 0.100
Education and social services 24 0.459 1.000

123
Effects of Women on Corporate Boards

Table 2 Descriptive statistics Variables Mean Median Std. dev. Min. Max.
of variables
Tobin’s Q 1.904 1.338 1.587 0.526 15.085
ROA 0.079 0.067 0.081 -0.274 0.722
ROS 0.150 0.117 0.436 -6.127 9.938
Ethics and social compliance 0.109 0.000 0.312 0.000 1.000
Women on board 0.140 0.125 0.104 0.000 0.583
30 % women on board 0.078 0.000 0.268 0.000 1.000
Governance Quality 0.529 0.522 0.088 0.220 0.733
Total assets (million Euros) 110,629.0 19,501.9 295,008.0 532.9 2,155,366.0
Leverage 0.192 0.177 0.136 0.000 0.676
Growth 0.086 0.048 0.554 -5.103 8.015
Age (years) 30.8 30.6 12.1 1.5 48.0
Board size (number of members) 14.9 14.0 6.0 4.0 42.0
No. of observations = 992

female directors increased from 0.049 in 2010 to 0.117 in
2012, an increase of approximately 140 %.6
Panel C of Table 1 shows mean values for the ‘pro-
portion of women on the board’ by groups of countries and
year. The groups represent the type of gender diversity
measure implemented in the country: (1) countries that
implemented legislation together with sanctions for non-
compliance (Belgium, France, Italy, and Norway); (2)
countries that introduced legislation, but no sanctions are in
place for non-compliance (Austria, Denmark, Finland,
Greece, Netherlands, Spain, and Portugal); and (3) coun-
tries where gender diversity is achieved via voluntary pri-
vate initiatives (Ireland, Germany, Sweden, and
Switzerland). We observe that the tendency for a higher
presence of women on boards occurs in all groups of
countries, but it is in the last sample year that the differ-
ences across countries are most striking. The highest
increase in the proportion of female directors occurs in
countries that have legislation with sanctions. The pro-
portion grew from 0.125 in 2011 to 0.205 in 2012. This
increase is a direct result of the recent introduction of
legislation accompanied with sanctions. The increase is
significantly higher than in the other two groups of coun-
tries as the hypotheses of equality of values between
groups are rejected in the test (1) - (2) = 0 and test (1) -
(3) = 0. It is interesting to observe that there is no statis-
tical difference between the proportion of female directors
in countries with board diversity legislation but no sanc-
tions, and countries that have only voluntary initiatives.
This result suggests that regulation without enforcement
has virtually no effect in promoting gender diversity on
corporate boards. That result also gives support to the
6
We recall that the women on board variables are lagged variables,
and the statistics shown in Table 1 are thus for women on board in
year t - 1.
European Commission initiative to impose mandatory
regulation as a way to break the glass ceiling that bars
women from top positions in Europe’s large firms.
Table 1 Panel D reports industry variation in the pro-
portion of women on boards. In the education and social
services sector, almost half of the firms have female
directors, and in almost all firms, women represent 30 % or
more of the board members. The reason for the high pro-
portion is the regulation that exists in several European
countries imposing quotas for women in State-owned
companies, which are common in the education and social
services sector. Another possible reason is the higher
number of women that typically work in these sectors. The
industries with lower representation of women on boards
are natural resources, manufacturing, and transportation.
Table 2 presents descriptive statistics for the variables
used in the empirical estimations. The mean Tobin’s Q
being greater than one indicates that investors expect the
invested resources to generate value in the future. The mean
ROA is 7.9 %, and the mean ROS is 15 %. On average,
10.9 % of the firms have an ethics or social responsibility
committee. The mean governance score is 0.529, indicating
that the sample firms fulfill roughly half of the Aggarwal
et al.’s (2011) attributes. The sample firms are large, but
there is substantial variation in firm size as the standard
deviation of total assets (295,008 million Euros) suggests.
The mean of leverage is 0.192, and the mean of sales growth
is 8.6 %. The average sample firm has over 30 years of age,
and its board has approximately 14 members.
Table 3 reports correlations between variables. As
expected, there is high correlation between Tobin’s Q and
the financial performance variables ROA and ROS. Size,
leverage, age, and board size are significantly and nega-
tively correlated with firm value. Women on board are
positively correlated with the dependent variables Tobin’s
Q, ROA, and ethical and social compliance.

123
 H. Isidro and M. Sobral

(12)
Analysis of the Results of the Simultaneous Estimation

1
Model

0.0721*
Tables 4 and 5 show the results of estimating the simul-
(11)

1
taneous regression model. In Table 4, we report the results
using ROA as the measure of accounting-based financial

-0.0325
0.0015
performance, and in Table 5, the results using ROS. In the
(10)

1
first part of Table 3, we present the estimation results for
the first structural equation in the model (firm value). The

-0.1211*
0.0550*
-0.0005
most important result is that we do not find statistical
evidence of a direct relationship between women on the
1
(9)

board on firm value, for both definitions of the variable.

Therefore, we do not confirm hypothesis 1. As expected,
-0.0697*

0.1257*
0.4538*
-0.0115
financial performance measured as ROA is positively
associated with firm value. The firm’s compliance with the
1
(8)

ethical and social standards is perceived by investors as a

value-creating activity as the positive and significant
-0.0774*

-0.2856*
0.0306
-0.0375

-0.0231

coefficient indicates. The predicted value of Tobin’s Q for

1
(7)

a firm with no separate committee of ethics and social

responsibility is 1.73, keeping all other variables at their
-0.0736*

0.0726*

-0.1133*

mean, whereas the predicted value of Tobin’s Q for a firm

-0.0293

-0.0133
-0.0075

with that committee is 3.31. That is, Tobin’s Q increases

1
(6)

91 %, a result that is economically meaningful.

We next turn to the indirect effects of women on the
0.6390*

-0.0720*
0.0965*
-0.1370*
0.0505
0.0413
0.0126

board on firm value captured through ROA and through

ethical and social compliance. The second part of Table 4
1
(5)

shows the estimation results for Eq. (2) regarding the

influence of female directors on ROA. We find a positive
0.0723*

0.1030*
0.1180*

-0.0592*
-0.0122

-0.0017

0.0392
-0.0114

and significant effect on financial performance. The indi-

rect effect of women on the board on firm value embedded
1
(4)

in ROA is given by the product of the estimated coefficient

-0.0630*

-0.0770*

-0.0853*

of variables women on board in Eq. (2) and variable ROA

-0.0076
-0.0018
-0.0022
0.0245

0.0195

-0.0305

Pearson correlations. The symbols * indicate statistical significance at 5 %

in Eq. (1). We test the hypothesis that the cross-effect is

1
(3)

null and we reject it at the 1 % significance level

(v2 = 61.31, p value \0.001). This result suggests that
0.2851*

0.0589*
0.0926*

-0.4796*
-0.0630*

-0.2883*
-0.0246

0.0515

0.0258
-0.0433

there is an indirect relationship between women on board

and firm value that is captured by ROA. In other words,
1
(2)

women on board positively affect financial performance

which in turn positively impacts on firm value. But women
0.6088*
0.0828*

0.1029*
0.0979*

-0.4392*
-0.1104*

-0.0545*
-0.2357*
-0.0050

0.0437

0.0100

on board does not have a significant direct impact on firm

value.7 We repeat the test for the model that uses the
1
(1)

variable ‘30 % or more women on the board’ and obtain

similar results. We therefore confirm hypothesis 2.
Ethical and social compliance

The third part of Table 4 presents the estimation results

30 % women on board

for Eq. (3). The results suggest a positive relationship

Board size (number)
Size (million Euros)
Governance quality

No. of observations = 992

between women on board and the firm’s compliance with

Table 3 Correlation table

Women on board

Age (years)

7
Just to ensure that our results are not driven by the simultaneous
Tobin’s Q

Leverage

estimation methodology we estimate an OLS regression of Tobin’s Q

Growth

on women on board, ROA, and ethical and social compliance plus

ROA
ROS

control variables. The conclusions do not change. The estimated

coefficient for women on board is not statistically significant, whereas
the coefficients for ROA and ethical and social compliance are both
(10)
(11)
(12)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)

positive and significant.

123
Effects of Women on Corporate Boards

Table 4 Results of the Proportion of women on the 30 % or more women on the

simultaneous estimation of the board board
effects of women on corporate
boards on firm value, ROA, and Coeff. z-stat Coeff. z-stat
ethics and social compliance
Tobin’s Q
Women on board -0.328 (-0.596) -0.331 (-1.389)
ROA 0.688*** (3.706) 0.741*** (4.074)
Ethical and social compliance 1.583*** (3.680) 1.482*** (3.506)
Governance quality -0.590 (-1.433) -0.645 (-1.576)
Size -0.384*** (-9.139) -0.371*** (-8.982)
Leverage -1.894*** (-6.831) -1.933*** (-6.944)
Growth 0.035 (0.610) 0.030 (0.540)
Age -0.189*** (-2.832) -0.200*** (-3.000)
Country_legislation_nosanctions 0.286*** (2.840) 0.264*** (2.608)
Country_voluntary_initiatives 0.291*** (3.011) 0.277*** (2.874)
Intercept 9.588*** (9.064) 9.455*** (9.074)
ROA
Women on board 0.887** (2.283) 0.434** (2.479)
Ethical and social compliance 1.802*** (7.228) 1.644*** (6.613)
Governance quality -0.402 (-1.276) -0.221 (-0.706)
Size -0.249*** (-17.588) -0.241*** (-16.767)
Leverage -0.532*** (-3.182) -0.683*** (-3.964)
Growth 0.025 (0.632) 0.016 (0.398)
Age -0.016 (-0.350) -0.026 (-0.558)
Country_legislation_nosanctions 0.184** (2.498) 0.195*** (2.645)
Country_voluntary_initiatives 0.212*** (3.068) 0.210*** (3.042)
Intercept 5.001*** (9.942) 4.989*** (9.701)
Ethical and social compliance
Women on board 1.255*** (3.747) 1.232*** (4.130)
Governance quality -0.029 (2.834) 0.131 (0.586)
Board size 0.031 (1.007) 0.042 (1.196)
Country_legislation_nosanctions 0.238* (1.914) -0.180 (-1.177)
Country_voluntary_initiatives 0.341** (2.194) -0.163 (-0.990)
Intercept -0.489*** (-2.974) -0.068** (-2.202)
Estimates from simultaneous
No. observations 992 992
equation model. The symbols
***, **, * indicate statistical v2 (Eq. 1) 901.3 906.1
significance at 1, 5, and 10 % v2 (Eq. 2) 370.7 348.2
levels of statistical significance v2 (Eq. 3) 84.9 178.4
for two-tailed tests

their stated ethical and social standards. The likelihood of a
firm having an ethics and social responsibility committee
increases by 1.255 if the proportion of female directors
increases by 1 %. That likelihood increases by 0.232 if
there are 30 % or more women on the board of directors.
We next assess the effect on firm value of an increase in the
commitment to ethical and social issues that are due to the
presence of women on the board. The test of the cross-
effect of the coefficients of ‘women on board’ in Eq. (3)
and ‘ethical and social compliance’ in Eq. (1) confirms that
there is a positive indirect effect on firm value (v2 = 6.84,
p value = 0.009). The empirical findings suggest that the
appointment of women to the board enhances the firm’s
compliance with ethical and social principles, something
that is valued by investors.8
Regarding the control variables, we find the following.
Size is negatively related with firm value and performance
because large firms have more complex activities and are
more difficult to monitor by investors. As expected,
leverage reduces firm value because it deviates cash from
8
To take advantage of the panel data, we re-estimate the model
adding firm individual effects. Our results are similar, and the
conclusions remain the same.

123
 H. Isidro and M. Sobral

Table 5 Results of the Proportion of women on the 30 % or more women on the

simultaneous estimation of the board board
effects of women on corporate
boards on firm value, ROS, and Coeff. z-stat Coeff. z-stat
ethics and social compliance
Tobin’s Q
Women on board -1.643 (-1.222) -0.695 (-1.334)
ROS 3.534** (2.113) 3.246** (2.213)
Ethical and social compliance 1.785** (2.176) 1.720** (2.186)
Governance quality -0.487 (-0.579) -0.692 (-0.865)
Size -0.362*** (-4.321) -0.371*** (-4.825)
Leverage -2.826*** (-4.588) -2.676*** (-4.790)
Growth 0.245 (1.562) 0.232 (1.582)
Age -0.176 (-1.247) -0.182 (-1.351)
Country_legislation_nosanctions 0.468** (2.335) 0.441** (2.303)
Country_voluntary_initiatives 0.274 (1.395) 0.287 (1.547)
Intercept 9.196*** (4.358) 9.425*** (4.807)
ROS
Women on board 0.417* (1.914) 0.129 (1.282)
Ethical and social compliance -0.100 (-0.692) -0.085 (-0.588)
Governance quality -0.036 (-0.204) 0.008 (0.047)
Size -0.013 (-1.559) -0.013 (-1.495)
Leverage 0.164 (1.559) 0.139 (1.333)
Growth 0.072*** (2.782) 0.075*** (2.913)
Age -0.024 (-0.832) -0.024 (-0.827)
Country_legislation_nosanction -0.009 (-0.218) -0.006 (-0.135)
Country_voluntary_initiatives 0.056 (1.445) 0.055 (1.411)
Intercept 0.516* (1.659) 0.534* (1.719)
Ethical and social compliance
Women on board 1.057*** (2.873) 0.734** (2.348)
Governance quality -0.178 (1.756) 0.123 (-0.310)
Board size 0.023 (0.684) 0.037 (0.935)
Country_legislation_nosanctions -0.102 (-0.677) -0.082 (-0.486)
Country_voluntary_initiatives -0.015 (-0.093) -0.062 (-0.343)
Intercept 0.162 (1.461) 0.210* (1.737)
Estimates from simultaneous
No. observations 992 992
equation model. The symbols
***, **, * indicate statistical v2 (Eq. 1) 288.1 311.8
significance at 1, 5, and 10 % v2 (Eq. 2) 22.4 20.6
levels of statistical significance v2 (Eq. 3) 222.7 178.1
for two-tailed tests

investments to debt commitments. Age is negatively rela-
ted with firm value suggesting that mature firms are more
rigid and less efficient. The country-level indicators are
positively associated with firm value, performance, and the
presence of ethics and social responsibility committee. The
coefficient of country_legislation_nosanctions (or coun-
try_voluntary_initiatives) in Eq. (1) represents the differ-
ence between that group of countries’ mean Tobin’s Q and
the mean Tobin’s Q in the countries with legislation with
sanctions (the excluded indicator). For example, the posi-
tive coefficient of country_voluntary_initiatives indicates
that firms from countries that have only voluntary
initiatives on board gender diversity (Ireland, Germany,
Sweden, and UK) have a higher mean firm value than that
of firms from countries that implemented legislation with
sanctions (Belgium, France, Italy, and Norway).
For economy of space, we do not report the coefficients
for the industry indicators. The excluded indicator is for
industry SIC 1 (agriculture and natural resources). We find
significant differences in firm value between firms in
industry SIC 1 and firms in industry SIC 2 (basic fabrica-
tion), between firms in industry SIC 1 and firms in industry
SIC3 (manufacturing), and between firms in industry SIC 1
and firms in industry SIC 6 (financial services).

123
Effects of Women on Corporate Boards
As explained in the variable definition section, we use
the lag of women on board variables to address causality
problems and because the economic effect of female
directors might not occur immediately. This delayed effect
of women on board is most critical in the case of the
accounting-based measures of performance because
accounting is based on past events. The market value of the
firm, captured by Tobin’s Q, reflects future expectations
and is thus more likely to reflect board diversity in a timely
manner. For that reason, we repeat the empirical estima-
tions using the contemporaneous ‘woman on board’ vari-
ables in Eq. (1) and the lagged ‘woman on board’ variables
in Eqs. (2) and (3). Our conclusions do not change.9
We also consider that countries are subject to different
corporate tax regimes; therefore, variation in ROA might
reflect tax differences rather than differences in financial
performance. To account for this effect, we re-estimate the
model using ROA before tax (earnings before tax divided
by total assets). The results are very similar, and the con-
clusions do not change.10
In Table 5, we repeat the empirical analysis using ROS
as financial performance measure. While ROA reflects the
efficiency of the firm in using its resources to generate
profits, ROS represents the firm’s operating efficiency.
ROS reflects the ability to increase sales and reduce pro-
duction costs, and can therefore be seen as an indicator of
the firm’s profit-margin competitiveness. The results are
weaker but in line with those reported in Table 4. There is
a positive relationship between ROS and firm value, and
between ethical and social compliance and firm value. But
there is no direct association between women on board and
firm value. The variable women on board have a positive
but modest effect on ROS and a strong positive effect on
the compliance with ethical and social standards. The
indirect valuation effect of women on the board captured
by ROS is positive and statistically significant. As reported
in Table 4, the presence of women on the board increases
the firm’s likelihood of compliance with ethical and social
standards, and that effect subsequently impacts on firm
value. The results for the control variables are generally in
9 with the ethical and social standards of the firm. Fourth, the
Estimated coefficients (and z-stats) for the variables of interest are
the following. Equation (1): women on board at year t 0.679 (1.52),
ROA 0.437 (2.16), ethical and social compliance 2.19 (4.14).
Equation (2): women on board at year t - 1 1.165 (3.25), ethical
and social compliance 1.93 (5.99). Equation (3): women on board at
year t - 1 0.474 (2.56). We obtain similar results using ROA before
tax.
10
The estimated coefficients (and z-stats) for the variables of interest
are the following. Equation (1): women on board -0.412 (-078),
pre-tax ROA 0.764 (3.92), ethical and social compliance 1.632 (3.82).
Equation (2): women on board 0.867 (2.45), ethical and social
compliance 1.318 (5.35). Equation (3): women on board 1.359 (3.75).
The results using the variable ‘30 % or more women on board’ yield
similar conclusions.
line with those reported in Table 4. Size is negatively
associated with firm value, and leverage is negatively
associated with firm value. The country variables are
related positively only with firm value.
Conclusion
Claims that firms with female directors have better financial
performance and create value are abundant in the business
press. Even the European Commission grounds their pro-
posal for introducing mandatory quotas for women on
corporate boards on the fact that firms with higher female
board representation outperform their peers (European
Commission 2012b). However, there is no definitive
empirical evidence that women’s participation on the board
leads to increased shareholder value. Some studies find
supportive evidence that having women on the board pos-
itively influences firm value and performance, while other
studies find that it reduces firm value. This study seeks to
shed light on the topic. Differently from earlier research that
has focused on the direct link between women on the board
and firm value, we propose that there may be indirect links.
Our argument is that the indirect effects of the presence of
women on board can occur through better financial per-
formance but also through improvements in other aspects of
the business, which are relevant for firm value. We focus on
the firm’s compliance with the ethical and social standards
adopted by the firm because other studies have found
positive effects of ethical and social corporate behavior on
firm value. To estimate the direct and indirect effects, we
apply a simultaneous equation model to a sample of large
European firms. The simultaneous estimation of the effects
of women on the board on firm value, financial perfor-
mance, and ethical and social compliance yields the fol-
lowing results. First, contrary to the business press claims,
we find no evidence that a greater female representation on
the board directly affects the firm’s value. Second, we show
a positive effect of women on the board on financial per-
formance measured as ROA and ROS. Third, we observe a
positive effect of women on the board on the compliance
positive effects on financial performance and ethics and
social compliance spill over to firm value. In other words,
we conclude that a greater female representation on cor-
porate boards of large European firms increases their firm
value, but indirectly. Part of the indirect effect comes from
non-financial dimensions of the business. Specifically,
women on the board improve the firm’s observance of
ethical and social policies, which in turn positively affects
the value of the firm. Our findings are important for Euro-
pean regulators addressing the introduction of mandatory
quotas for women on boards. We believe that regulators
123
 H. Isidro and M. Sobral

should consider that promoting the presence of women in Appendix

top positions in European corporations has both financial
and non-financial implications. See Table 6.

Table 6 European Legislative and Voluntary Initiates for Gender Diversity in the Board of Directors
Country Legislative Type of legislation Sanctions Voluntary initiatives
measures
applicable to

Austria State-owned Legislation from 2011 introduced non-mandatory No Corporate Governance Code recommends
companies target of 25 % women on boards by 2013 and gender balance in appointments to the
35 % by 2018 board
Belgium State-owned, Legislation from 2011 requires at least one-third Yes Corporate Governance Code recommends
listed of each gender in boards by 2012 (state-owned gender diversity in the board
companies companies), 2017 (listed companies), or 2019
(listed SMEs)
Denmark State-owned, State-owned companies should ‘as far as No Corporate Governance Code recommends
large possible’ have gender balanced board gender diversity in the board
companies
Starting 2013, legislation requires large
companies to set voluntary targets for the
proportion of the under-represented gender in
the supreme management body
Finland State-owned Boards of state-owned companies are required to No Government’s equality policies and
companies have an ‘equitable proportion of women and Corporate Governance Code recommends
men’ gender diversity in the board
France Large Legislation from 2011 imposes a quota of 20 % Yes Corporate Code recommends quotas similar
companies women on the board to be achieved by 2014 to the law
and 40 % by 2017, applicable to both listed and
unlisted companies employing at least 500
workers and with revenues over €50 million
Germany In 2013, the upper house of parliament vote in No. Corporate Governance Code recommends
favor of a quota of 30 % women on board in Voluntary that listed companies should establish
supervisory boards of listed and other until 2013 targets for their composition, including
companies applicable in 2020 ‘appropriate participation’ of women
In 2011, DAX 30 companies agreed to
company-specific voluntary targets
Greece State-owned One-third of state appointees to boards of state- No
owned companies must be from each sex
Ireland No Voluntary
Italy State-owned, Legislation from 2011 requires public companies Yes
listed and state-owned companies to have at least
companies 33 % of each gender on their boards by 2015
(with a target of 20 % for the transitional
period)
Netherlands Large Legislation from 2011 requires large companies No Corporate Governance Code recommends
companies to achieve a gender balance (30 % of each sex) gender diversity in the board
in boards
Norway State-owned, Legislation from 2006 defines mandatory 40 % Yes
listed, and quotas for women on the boards
other
companies
Portugal State-owned Legislation from 2012 requires state-owned No Government recommends listed firms to
companies companies to adopt gender equality plans follow a gender equality policy in board
appointments

123
Effects of Women on Corporate Boards
Table 6 continued
Country Legislative Type of legislation
measures
applicable to
Spain Public Legislation from 2007 recommends public
companies companies with 250 or more employees to have
at least 40 % of each gender on their boards by
2015
Sweden
Switzerland
UK
Source European Commission Gender Equality Newsroom (2013) and Swiss Business Federation
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