When Women Are on Boards, Male CEOs Are Less Overconfident

A number of governments are pushing for greater female representation in the boardroom. And several studies suggest why: Having women on the board results in better acquisition and investment decisions and in less aggressive risk-taking, yielding benefits for shareholders. What’s less clear is why these effects happen.

Our research suggests one potential reason: Having female board members helps temper the overconfidence of male CEOs.

To test this, we gathered data on 1,629 firms in the U.S. We examined whether CEOs were less likely to exhibit overconfidence when there were women on their board, and how this effect influenced corporate decisions and performance.

To assess overconfidence, we looked at CEOs’ option-exercise behavior. Unlike corporate decisions that reflect top management’s collective beliefs, the personal choice of holding or exercising vested options is likely to reveal a CEO’s individual beliefs and confidence about the company.

We then analyzed whether female board representation affected this behavior. We found a significant relationship between female board representation and the overconfidence measure for male CEOs.

In our data, we found that the most overconfident CEOs were in industries like pharmaceuticals, computer software, coal and construction. And we did find that having at least one female director on the board was associated with less aggressive investment policies, better acquisition decisions and ultimately improved firm performance in these industries.

To further examine how female board members affect firm performance, we looked at differences in accounting and stock performance for over 500 firms during the financial crisis of 2007 to 2009. We expected CEO overconfidence resulted in poor performance during the crisis, as it might have led CEOs to pursue aggressive strategies that made their firms more vulnerable. But because female directors might be more likely to temper these CEOs’ behavior, we expected to see better performance during the crisis for firms with female directors.

Our results were consistent with this prediction.

Our study has two important implications. First, it suggests that female board representation matters more in certain industries, because some industries have more overconfident CEOs. Second, our findings suggest female board representation can be especially beneficial in helping firms weather crises. Our research supports the view that having women on boards improves strategic decision-making and benefits firms.

(Jie Chen is an associate professor in finance at the University of Leeds. Woon Sau Leung is an associate professor in finance at the University of Edinburgh. Wei Song is an associate professor in finance at the University of Southampton. Marc Goergen is a professor in finance at IE University.)

Copyright 2019 Harvard Business School Publishing Corp. Distributed by The New York Times Syndicate.