The impact of gender-diverse board and institutional investors on accruals management

Institutional investors are large proponents of increasing gender diversity on firms’ boards. However, it is an open question whether firms with institutional investors who favor monitoring, benefit from increasing the diversity of their boards. The objective of this paper is to investigate this issue by analyzing how the presence of institutional investors who favor monitoring, and a gender-diverse board, impact one aspect of governance, i.e., firms’ earnings management. In our empirical investigation, we perform fixed-effect panel regressions on a sample of 5668​ firm-years over the period 2007 to 2014. Building on the literature that finds that independent institutional investors with long-term investment and concentrated ownership (ILTICO) are more likely to favor monitoring, we first confirm that both and ILTICO and board gender diversity reduce abnormal accruals, our measure of earnings management. In particular, we confirm a significant negative relation between each of these strong governance mechanisms and the level of abnormal accruals. However, we provide robust evidence that the combined effect of a gender-diverse board and ILTICO is an increase in accruals-based earnings management. By further investigating the combined effect using a GMM model, we attribute the increase in earnings management to the fact that these two governance mechanisms are substitutes. In other words, they do not constitute an efficient bundle. The results are robust after controlling for holdings, board, CEO, auditor and financial characteristics; using different models of abnormal accruals; and using alternative definitions of board gender diversity. Our results highlight the need to consider whether governance factors are complements or substitutes when combining them.