The Token Woman

Abstract

We examine gender diversity, its impact on firm performance and earnings quality and particularly whether a critical number of female directors are required to empower them to best fulfil their duties on corporate boards. The extant literature shows a positive association exists between diversity (measured as one woman on the board) and earnings quality, but no relationship with performance is documented. We propose these studies measure “tokenism” (having one woman on the board) rather than diversity (having enough female directors to empower them) and that a critical mass (number of women) is needed for “normalization” to occur allowing removal of the gender barrier (Asch, 1951). We therefore examine boards with three or more female directors in relation to firm performance and earnings management and show firms with at least three female directors significantly outperformed others and also have better earnings quality. True gender diversity therefore appears to be associated with improved performance; tokenism, on the other hand, is not.

Keywords: Gender diversity, firm performance, disclosure quality, corporate governance

JEL Classification: G30, G34, M41