Women on Boards and Corporate Social Irresponsibility: Evidence From a Granger Style Reverse Causality Minimisation Procedure

50 Pages Posted: 8 Feb 2020 Last revised: 19 Oct 2020

See all articles by Chris Godfrey

Chris Godfrey

University of Manchester - Alliance Manchester Business School

Andreas G. F. Hoepner

Smurfit Graduate Business School, University College Dublin; European Commission's Platform on Sustainable Finance; Stockholm School of Economics - Mistra Financial Systems (MFS)

Ming-Tsung Lin

University of Essex

Ser-Huang Poon

Alliance Manchester Business School, University of Manchester; Alan Turing Institute

Date Written: January 19, 2020

Abstract

We study the relationship between gender diversity on boards and corporate social irresponsibility (CSI). We hypothesize a bi-directional causality. Firms exposed to CSI incidents are likely to increase their board gender diversity for reputational purposes. At the same time, board gender diversity diversifies board skills and networks, thereby building board capital and enhancing its monitoring function which in turn should result in the ability to reduce CSI incidents. In econometric terms, this relationship is plagued with a reverse causality issue. To address this, we propose a Granger-style reverse causality minimisation procedure. This procedure involves three steps. Firstly, we regress board diversity (BD) on lagged CSI to separate diversity into two components, one driven by CSI (BDDCS) and another unrelated to CSI (BDUCS), with the latter being the sum of the intercept and the disturbance term. Secondly, we confirm that BDUCS experiences a near-zero correlation to CSI (0.01 compared to 0.26 for BD and CSI), and that a Granger causality F-test for CSI affecting BDUCS is clearly insignificant. Thirdly, we regress CSI on lagged BDUCS, lagged CSI and its interaction term. Applying our Granger-style reverse causality minimisation procedure to 2,880 U.S. firms between 2007 and 2016, we find CSI to increase board diversity. Potentially more importantly, we also find that boards with higher diversity, for reasons other than CSI, were significantly better than their lower diversity counterparts in reducing CSI incidents once encountering them. This effect is economically stronger for diversity unrelated to CSI than for overall diversity.

Keywords: corporate scandals, diversity, endogeneity, reverse causality, women on boards

JEL Classification: C32, C52, J16, M14

Suggested Citation

Godfrey, Chris and Hoepner, Andreas G. F. and Lin, Ming-Tsung and Poon, Ser-Huang, Women on Boards and Corporate Social Irresponsibility: Evidence From a Granger Style Reverse Causality Minimisation Procedure (January 19, 2020). Forthcoming in European Journal of Finance, Previous version circulated as Michael J. Brennan Irish Finance Working Paper Series Research Paper No. 20-4, Available at SSRN: https://ssrn.com/abstract=3522205 or http://dx.doi.org/10.2139/ssrn.3522205

Chris Godfrey

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Andreas G. F. Hoepner (Contact Author)

Smurfit Graduate Business School, University College Dublin ( email )

Blackrock, Co. Dublin
Ireland

European Commission's Platform on Sustainable Finance ( email )

2 Rue de Spa
Brussels, 1000
Belgium

Stockholm School of Economics - Mistra Financial Systems (MFS) ( email )

MISUM
Box 6501, SE-113 83 Stockholm
Sweden

Ming-Tsung Lin

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

HOME PAGE: http://https://www.essex.ac.uk/people/linmi48001/ming-tsung-lin

Ser-Huang Poon

Alliance Manchester Business School, University of Manchester ( email )

Alliance Manchester Business School
Booth Street West
Manchester, Manchester M15 6PB
United Kingdom
+44 161 275 4031 (Phone)
+44 161 275 4023 (Fax)

HOME PAGE: http://www.manchester.ac.uk/research/Ser-huang.poon/

Alan Turing Institute ( email )

British Library, 96 Euston Road
London, NW12DB
United Kingdom

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