Female directors, earnings management, and CEO incentive compensation

Abstract

This study examines the effect of the exogenous increase in the presence of female directors on FTSE350 corporate boards in the UK, as mandated by the Davies Report (2011), on the association between earnings management and CEO incentive compensation. We use a hand-collected dataset of FTSE350 UK public companies between 2007 and 2015. The empirical design used is a difference-in-differences methodology where the treatment group is gender-diverse corporate boards and the control group is corporate boards that lack gender diversity. We use two measures of gender diversity that include executive and non-executive female directors. The results show a positive association between earnings management and CEO incentive compensation, and a negative association between female directors and earnings management. Moreover, the results suggest a negative effect for the presence of female directors on CEO incentive compensation. Finally, the main finding of the study is that female directors play a moderating role on the association between earnings management and CEO incentive compensation. Overall, we show some of the economic consequences that the increased presence of female directors on corporate boards carries to public firms.