Author's School

Olin Business School

Author's Department

Finance

Language

English (en)

Date of Award

Spring 5-15-2022

Degree Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Chair and Committee

Todd T. Milbourn

Committee Members

Anjan V. Thakor, Mark Leary, Xing Huang, Marcus Berliant,

Abstract

Does individual financial risk-taking behavior indeed vary by gender? If yes, how exactly? Moreover, what happens when individuals with differential tendencies (e.g., risk-taking, sense of higher purpose, et cetera) come together in small groups such as the corporate board to decide on financial risk-taking or conduct intense board oversight? What role does group or board structure play in all of these? In effect, how does the within-group power and influence asymmetry affect the manifestation of the individual tendencies in boards’ decisions, corporate behavior, and financial outcomes? The lack of conclusive answers to these questions is at the core of several vital debates at the intersection of behavioral economics and corporate finance (corporate governance in particular) with significant implications for government policies and legislations.

For example, while practitioners have mostly positive anecdotes on the impact of board gender diversity on firms’ financial performance, the empirical evidence in the academic literature remains mixed, with the debates still intensifying rather than abating. Also, while the original intention of intense board oversight was to help nip corporate misconduct in the bud and preserve long-term firm value, the extant empirical evidence shows an unintended loss in firm value instead. Is this always the case? Specifically, are there any individual attributes of the monitoring-intensive directors that can alter their approach to intense board oversight and potentially help reverse this unintended trend?

This dissertation provides new perspectives and answers to these questions and extracts practical, generalizable, and broadly applicable intuitions therefrom. Across three essays, each of which constitutes a chapter of the dissertation, I use some combination of novel data, empirical or analytical tools, and even new methods to shed new light on the above subjects and debates. My primary goal is to contribute to the reconciliation of the various mixed or extant adverse evidence. The first chapter focuses on the relationship between gender and risk-taking behavior and how the within-group power and influence distributions affect the manifestation of such individual tendencies in small groups. Specifically, I use the multiple Emmy Award-winning financial decision-making TV game show, Cash Cab, as a pseudo-laboratory. I find that, on average, compared with a male, a female will take less excessive financial risks (i.e., mainly when the ex-ante expected profit from the financial risk-taking is non-positive). However, in small groups, personal power and influence, not just numerical strength, determine whether such individual tendencies (e.g., risk-taking appetites) manifest in the collective decisions or outcomes. A main and generalizable intuition from the pseudo-lab setting is as follows: power and influence guarantees voice and inclusion (and therefore impact) within-group.

The second chapter builds on the main intuition from the first but uses the corporate board as the primary setting. In this new context, I evaluate how the within-board power and influence asymmetry affects the impact of board gender diversity on firms’ financial outcomes. To do this, I avoid the confounding effects of exogenous gender-diversification processes (such as gender quota legislations or laws). Nevertheless, I deal with the potential threat of endogenous selection using a sequence of stacked difference-in-differences estimations on mainly three sets of structured quasi-temporal event counterfactual samples. Overall, I find that if a female director is unlikely to have any personal power or influence on the board, her addition to the board will have no significant impact on firm risk-taking and performance. However, with increasing power/influence on the board (via greater numerical strength or non-token aggregate position), female directors will tend to reduce the excessive risk-taking behavior of the firm and, to the extent that the gender-diversification is non-disruptive, the expected risk-reduction effect can feature significant increases in profitability and firm value.

Finally, the third chapter turns to the unintended consequences of intense board oversight. Using a novel measure, this essay shows that when directors that are likely to have a higher sense of purpose lead the intense board oversight, the benefits improve significantly: earnings quality is higher; excess CEO compensation reduces; the time horizon perspective on CEO performance evaluation becomes longer. Overall, the findings show that religious monitoring-intensive directors differentially influence intense board oversight results and, thereby, help infuse or propagate a corporate culture consistent with an authentic organizational higher purpose.

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