Chapter 3 Previous Empirical studies and Hypotheses development
3.1 CEO characteristics and Capital Structure
3.1.5 CEO Gender
The percentage of female CEOs in listed UK companies is very low. The Davis report
(2011a: 2014b)3 focuses on increasing the number of female board members, as opposed
to increasing the number of female CEOs. The Davis report (2011a:2014b)4 provides
recommendations, as opposed to stipulating FTSE 350 companies must conform to a
percentage of female directors, and is voluntary. Since the first Davis report in 2011, the
number of women on FTSE 100 companies has increased by 8.2% between 2011-2014,
and female directors make up 20.7% of all directors in 2014. For FTSE 250 companies
the percentage of female directors has increased by 7.8% between 2011-2014, 15.5% of
directors are female in 2014. In 2011 there were 83 all male boards for FTSE 250
companies; by 2014 these boards have now recruited one or more female directors onto
their boards. The guidelines from the Davis report (2011a:2014b)5 are proposing quotas
for female directors for FTSE 100 and FTSE 250 companies. If this study finds that CEO
gender is impacting the capital efficiency, growth and therefore shareholder wealth, the
guidelines may be challenged by shareholders, and ultimately then companies. Higher
debt ratios for male CEOs in comparison to female CEOs have been found in a study by
Graham et al. (2013), in particular the higher short-term debt ratios.
Previous studies identify evidence of gender impacting corporate decisions, for the US
(Adams and Ferreira, 2009) and for companies in Norway (Ahern and Dittmar, 2012).
Ahern and Dittmar (2012) consider the impact of companies in Norway having to
3 2011
a Davis Report 2011, 2014b Davis Report 2014 4 2011
a Davis Report 2011, 2014b Davis Report 2014 5 2011
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conform to a percentage of female directors, for a 20% increase in female board
representation the leverage level increases by 6.4%, and increases the company’s
financial risk. The reasons behind the increase in leverage levels are thought to be
associated with changes in accounting standards, the results are found to be insignificant
for this particular study. There is very little evidence that the different characteristics of
men and women filter through to the corporate decisions, such as determining the level of
debt in a company’s capital structure.
Faccio et al. (2012) identifies how companies run by female CEOs have lower levels of
leverage, less volatility of earnings and a higher chance of survival, in comparison to
male CEOs. The research is found to be statistically significant, and provides evidence
that CEO gender does have an impact on risk taking choices. The evidence relates to the
allocation of capital, and demonstrates differences for capital efficiency, which is
dependent on the gender of the CEO. Confidence levels of the CEO demonstrate how
male CEOs have a higher confidence level, in comparison to female CEOs (Malmendier
et al., 2011). There are two implications, firstly the avoidance of ‘risky’ investments, and secondly, not undertaking all positive net present value projects. These two
implications are unable to be explained through the traditional theories (agency,
informational asymmetric and overconfidence). One explanation is the high number of
private companies in the study (Faccio et al., 2012); undiversified CEOs who have a large
proportion of their wealth concentrated within the company they are running, biasing the
results of the study. Risk avoidance behaviour is difficult to quantify, long-term studies,
such as this study, can identify relationships between the change in leverage and the
gender of the CEO.
Regardless of the sign of the relationship, the impact on capital structure concerns
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independent variable require guidance in The Code (1998:2009). The ability of the CEO
to have different risk levels in their role compared to their personal life is one area of
previous research; however, this remains subjective and in this study the personal risk
levels of the CEO will not be collected. If the study identifies a relationship between
CEO gender and capital structure, will this guide the decision-making process for the
selection of future CEOs?
3.1.5.1 CEO Gender Hypothesis
The main theory underlying the relationship between how the gender of the CEO can
have an impact on capital structure is behavioural theory (Malmendier et al., 2011).
Under perfect capital markets, investments are chosen in order to increase the company
valuation, managers undertake all positive net present value projects (Fama and Miller,
1972). Previous research on the characteristics of the decision-makers includes Agency
theory (Jensen and Meckling, 1976), asymmetric information (Myers and Majluf, 1984)
and behavioural theory (Malmendier et al., 2011). Bruce and Johnson (1994) and
Johnson and Powell (1994) consider how betting behaviour varies between men and
women; the studies find evidence that women have a lower level of risk taking in
comparison to men. A further study in relation to pensions (Bernasek and Shwiff, 2001)
finds women are more risk-adverse in relation to the allocation of their wealth in their
pension. The growing literature demonstrates that males have higher levels of
overconfidence than females (Barber and Odean, 2001), impacting their risk levels and
corporate decision-making. The impact on capital structure surrounds the differences
between the risk levels of debt and equity, with debt having a higher risk attached to it
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The concept that CEO characteristics play a role in the capital structure decisions is a
controversial topic; however a new area to consider in the constantly changing capital
structure puzzle. There are very few UK studies as the new reforms take time to filter
through to the Board of Directors. There is a low percentage of female directors serving
as directors on the Board of Directors of listed UK companies, and the percentage of
female directors being promoted to CEO of the company is very low. The implication of
the gender of the CEO determining the capital structure surround the selection process
when recruiting a new CEO.
There is no direct evidence as to whether there is a relationship between the gender of the
CEO and the choice between types of capital; previous research focuses on risk levels and
is linked to behavioural theory. In line with Adams and Ferrerira (2009), Faccio et al.
(2012) and Graham et al. (2013), the relationship is predicted to be negative between
female CEOs and debt levels. There is a lack of female CEOs in UK companies (Davis,
2011a:2014b)6; therefore, this study will consider the impact of female directors and the
percentage of female directors on the board (Section 3.2.1), in relation to the debt levels
of the company.
The hypothesis is:
H5: There is a negative relationship between female CEO and leverage.