Mitigating Effects of Gender Diverse Board in Companies Managed by Overconfident CEOs

Abstract

Prior literature posits that overconfident managers pursue aggressive investment and risk-taking strategies, and effective governance mechanism can help to restrain such behavior. We examine whether gender-diverse board helps to mitigate negative impacts of overconfident managers, and consequently improve firm performance. Specifically, we argue that women directors have different viewpoints and skill sets vis-a-vis their male counterparts – qualities that are necessary to achieve a more nuanced approach to corporate decision-making in an otherwise aggressive boardroom setting. Using data on 1500 S&P firms we find support for our main hypothesis. Further, we find that presence of only independent women director – neither gray nor insider – drives our result. Also, interestingly, we find that the positive effects of a gender-diverse board in companies headed by overconfident managers are limited to the only pre-SOX period and only limited to those firms that were SOX-non-compliant prior to the passage of SOX. Our results imply that implementing simpler governance-improving mechanism rather than imposing elaborate regulation may be in many cases equally effective in achieving desirable changes in management behavior.