Female Board Presence and the Likelihood of Financial Restatement

Abstract

SYNOPSIS: This paper investigates the impact of one form of board diversity on the incidence of financial restatement. More specifically, we hypothesize that there is a negative relation between female board presence (defined as whether or not a board has at least one female director) and the likelihood of a financial restatement. Our hypothesis is consistent with a female board presence contributing to the board's ability to maintain an attitude of mental independence, diminishing the extent of groupthink and enhancing the ability of the board to monitor financial reporting. Utilizing the U.S. General Accounting Office (U.S. GAO 2002) report on restatements, we construct a matched-pair sample of 278 annual (187 quarterly) restatement and 278 annual (187 quarterly) control firms. After controlling for other restatement-related factors, we find a significant association between the presence of at least one woman on the board and a lower likelihood of restatement. Our results continue to hold in annual restatements from the post-Sarbanes-Oxley (SOX) time period.

Board Gender Diversity and Internal Control Weaknesses

“…Female directors differ in their decision-making styles (Bilimoria, 2000;Peterson & Philpot, 2007), which may lead them to demand different information from top management than male directors. 3 In the context of financial reporting decisions, existing empirical evidence suggests that female board presence leads to higher accruals quality (Srinidhi, Gul, & Tsui, 2011) and fewer accounting restatements (Abbott, Parker, & Presley, 2012). This is consistent with female board members using higher quality disclosures as a monitoring mechanism to monitor top management (Gul, Srinidhi, & Ng, 2011).…”

Female CEOs and Core Earnings Quality: New Evidence on the Ethics Versus Risk-Aversion Puzzle

“…For example, existing evidence indicates that the presence of women on corporate boards: (i) reduces the probability of corporate fraud (Capezio and Mavisakalyan 2016;Cumming et al 2015), (ii) enhances earnings quality (Peni and Vahamaa 2010;Srinidhi et al 2011;Zalata et al 2018); and reduces the likelihood of financial statement re-statements (Abbott et al 2012). Similarly, several findings suggest that executive female directors are associated with: (i) more conservative financial reporting (Ho et al 2015;Palvia et al 2015), (ii) higher accounting quality (Barua et al 2010b), and (iii) lower fraudulent financial reporting (Sun et al 2017).…”

“…Nonetheless, the role of gender differences in securing the integrity of financial reports is not fully understood (Barua et al 2010b;Ho et al 2015), and the extant research is yet to provide a direct explanation for why female CEOs are less likely to engage in earnings management than their male counterparts are. 8 Furthermore, prior studies (Cumming et al 2015;Peni and Vahamaa 2010;Sun et al 2017) have investigated the relationship between female CEOs and AEM that, arguably, has higher potential litigation and reputation costs because of the intense public and regulatory scrutiny (Abbott et al 2012), particularly after the financial scandals in 2000 (Barua et al 2010b;Bruns and Merchant 1990;Merchant and Rockness 1994). Consequently, we argue that if female CEOs are more risk-averse than ethical, then they may be less inclined to engage in AEM largely because of the significant associated risk.…”

“…Extant research provides different theoretical explanations as to why women and men exhibit distinct business behaviors (Abbott et al 2012;Peni and Vahamaa 2010;Srinidhi et al 2011). In particular, researchers have identified two main factors that might drive the different business behavior among women and men, namely attributes relating to their (i) ethical stands and (ii) risk preferences (Croson and Gneezy 2009;Palvia et al 2015).…”

Female Directors and Firm Performance: Evidence from UK Listed Firms

“…Appointing female directors is highly associated with a board's effectiveness (Adams and Ferreira 2009;Jurkus et al 2011;Abbot et al 2012;Srinidhi et al 2011;Kyaw et al 2015;Chen et al 2016) in terms of: (1) better governance and a good atmosphere in the board room; (2) accountability and transparency in financial reporting; (3) improved decision-making in investment and financing decisions. Appointing female directors to firms with strong governance, which is proxied by the large firms, leads to the problem of over-monitoring.…”