Board Gender Diversity and Investment Inefficiency

Abstract

This paper investigates the effect of board gender diversity on a firm’s investment inefficiency and finds that a firm with at least one female director on its board has significantly less investment inefficiency than firms without one. The fraction of female directors on the board has a significantly negative association with investment inefficiency. An instrumental variable approach shows that this relation is robust after addressing endogeneity concerns. Furthermore, the effect of board gender diversity on investment inefficiency is more pronounced for over-investment than under-investment. Consistently, the effect is stronger for firms that have a propensity to over-invest ex-ante. It is also found that board independence is a channel for board gender diversity to reduce investment inefficiency.