Impact of board gender diversity on earnings management and disclosures

Abstract

The Companies Act 2013 mandated the presence of at least one woman on the corporate boards of all the listed firms. The presence of gender diversity has positively influenced firms’ performance, as suggested by various studies. The purpose of this study was to observe the effects of the presence of females on the board with respect to the earnings management and disclosure of environmental practices, social practices, and corporate governance, leading to sustainable practices. Based on ~1675 firm-year observations for a period of 4 years from 2016 to 2019, a regression analysis has been undertaken to understand the relationship of board gender diversity with earnings management as well as the breadth of reporting of BSE 500 companies. Discretionary accruals calculated using the modified Jones model have been used as a measure of earnings management. ESG scores from Bloomberg on all three dimensions: environmental, social, and governance, have been used as a proxy for the breadth of reporting. Both the OLS and fixed-effects models of regression have been used given the type of panel data available. The empirical results show that firms with greater gender diversity on boards and larger board sizes are more effective in restricting earnings management practices. Further, smaller firms are more likely to follow conservative earnings reporting as compared to larger firms. The results also show that women's involvement on board impacts the reporting with respect to social and governance disclosures. However, there is no significant relationship between board gender diversity and environmental disclosure scores. These findings may help the firms in deciding the right mix of gender on the boards in order to adopt sustainable practices in an emerging economy. By taking inputs from the findings, regulators and other relevant institutions can formulate policies to foster gender diversity for keeping earnings management in control.