Past evidence generally suggests that the presence of female directors on corporate boards tends to improve earnings quality due to these directors’ superior monitoring abilities. However, it is not clear which characteristics and skills of female directors drive such abilities. In this paper, we focus on the financial background of female directors, an area which remains largely unexplored in existing literature. The results show that the participation of female directors with relevant financial background improves earnings quality more than the participation of female directors without such background. In addition, our findings suggest that only female directors possessing relevant financial background and having fewer outside directorships are able to mitigate earnings management and therefore overcommitting expert female directors with more outside directorships would diminish their monitoring ability. We did not find any evidence suggesting that female directors without relevant financial background are able to mitigate earnings management, irrespective of their outside directorships or tenure. We interpret our findings within a theoretical framework that draws on a number of economic and social theories. The results are generally robust after controlling for potential endogeneity problems.
The findings of past studies generally suggest that female directors tend to have a positive effect on a number of corporate outcomes, performance and stock price informativeness (Carter et al. 2003; Gul et al. 2011, 2013; Srinidhi et al. 2011; Kirsch 2018). However, the precise channels through which female directors are able to improve shareholder value in corporate boardrooms are not clear to date (Adams and Ferreira 2009). The central objective of this study, therefore, is to investigate whether it is the specialist skills and professional expertise (in this case, the financial background) of female directors that is associated with less earnings management rather than their gender per se, or otherwise.
Meanwhile, gender diversity has received growing attention throughout the last decade and, in general, there is a global call for the presence of women on corporate boards as a means of improving corporate decision-making and governance (Adams and Ferreira 2009; Cumming et al. 2015; Nguyen et al. 2020). Some countries have initiated a spate of legislative changes requiring a predetermined representation of female directors on corporate boards (Terjesen et al. 2009; Terjesen and Sealy 2016). For instance, Norway requires 40% of women’s representation on corporate boards, with penalties for non-compliance. Following this, Spain and Sweden have considered female representation on corporate boards of 40% and 25%, respectively and, consequently, the EU recently proposed women’s board representation of 25% for large listed firms (Terjesen et al. 2009; Terjesen and Sealy 2016). A number of other developed and developing countries, such as Australia, Brazil, Canada and India, amongst others, have adopted or proposed similar quotas for women (Khlif and Achek 2017; Kirsch 2018) and, in the US, there has been a growing presence of female directors over the last two decades, although the appointment of female directors is still voluntary (Catalyst Group 2004).
The extant studies demonstrate that the presence of female directors on corporate boards can enhance earnings quality. However, they assume that female directors are homogeneous and, therefore, they have not delved into the interpersonal differences within female directors as a group. For instance, there might be differences between female directors not only in the stance they take towards managerial opportunism, but also in terms of their financial expertise (Sun et al. 2011). That is, while female directors might have a strong motivation to constrain managerial opportunism, they might lack the required financial expertise to perform this function. Therefore, drawing unique insights from a number of economic and social theories, and a large sample of US firms, this study examines whether gender per se has a real impact on earnings quality, or alternatively, whether it is the female directors’ financial expertise that matters. Unlike prior studies, the current study splits female directors into two groups based on their financial background.