Paper: Gender and corporate finance: Are male executives overconfident relative to female executives?

1. Gender and corporate finance:
Are male executives overconfident
relative to female executives?
Jiekun Huang, Darren J. Kisgen; Journal of Financial Economics(2013)

2. •Introduction
•Hypothesis
•Main empirical tests
•Conclusion
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3. Introduction
THE FIRST PART

4. The number of female top executives in the U.S.
has increased significantly. Among major U.S.
corporations in 2005, 7.5% of Chief Financial
Officers (CFOs) and 1.5% of CEOs were women,
versus 3.0% and 0.5% in 1994, respectively.
Despite this increase in female representation,
previous research has not examined whether
gender plays a role in corporate decisions.

5. Introduction
• Q1. Whether the gender of an executive has a material impact on
corporate decision making.
• Q2. Whether the differences in behavior we identify have an impact
on shareholder value.
• Why examining this is important ?
• Provide more insights into corporate behavior.
• The representation of women in higher ranking executive positions continues
to be relatively small.
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6. Introduction
• Test
• Whether firms with female executives (CEOs and CFOs) make different
financing or acquisition decisions compared with firms with male executives.
• Whether any differences in decisions identified for women are better or
worse for shareholder value.
• Primary Hypothesis
• Male executives are overconfident in corporate finance
decisions compared with women.
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7. Gender differences
and executive decisions
THE SECOND PART

8. Women undertake fewer projects, or more generally make fewer
significant decisions, than men, holding other factors constant.
• Examining the frequency of acquisitions, debt issuance, and equity
issuance decisions for male vs. female executives.
• Overconfident men overestimate NPVs, undertake more transactions.
• Announcement returns surrounding acquisitions, equity issuance, and debt
issuance decisions for male vs. female executives.
• Decisions made by women have more positive market reactions.
• If men are more overconfident in their decision making, the market should
respond more negatively on average.
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2.1 Gender behavioral differences

9. • Previous literature : women are relatively more risk averse than men
Career outcomes :
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2.1 Gender behavioral differences
Women are risk averse
 to the detriment of shareholders
 board will identify this
 get fired or generally be less
likely to maintain their job
Men are overconfident
 the detriment of shareholders
 get fired or leave their position
Test whether women are more or less likely to retain their position as CEO
or CFO relative to male executives

10. • Earnings forecasts:
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2.1 Gender behavioral differences
Men are overconfident
narrow confidence intervals
 they provide narrower ranges for earnings forecasts than women.
Test for overconfidence directly is to examine earnings forecasts for male
executive versus female executive firms.

11. stock option exercising stock purchase
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2.1 Gender behavioral differences
Test: stock option exercising and stock purchase behavior of executives to
measure overconfidence
Executives as overconfident
if they persistently fail to reduce their exposure to the idiosyncratic risk
of their firms.
Whether female vs. male
executives are more likely to
hold company stock options
that are deep in the money.
whether they are more likely to
buy shares in company stock
despite already high exposure to
company risk.

12. • likelihood for shareholder value destroying acquisitions
Overconfidence men undertake some negative NPV projects
Note: Because some of the market reaction to an acquisition might be related
to the funding → conduct this test , acquisitions are financed with cash only.
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2.1 Gender behavioral differences
Test : probability that a firm undertakes an acquisition that is value destroying
for shareholders

13. Main empirical tests
THE THIRD PART

14. Data
• We focus on CEOs and CFOs because the sample of CEOs alone is too small for
meaningful analysis.
Source:
• Female executives: ExecuComp
• Sample from 1993 to 2005, (name, gender, and rank of the executive)
• For the remaining firm-year observations, collect the name and gender of the
incumbent executive of a firm-year by searching the 10K filing of the firm through
the SEC EDGAR system → Factiva, company's website… to identify the gender.
• Condition:
• firms with book assets > $500 million
• NYSE, Amex or Nasdaq-listed firm in Compustat
• Yields 26,668 firm-year observations

15. Data
• Executive transition sample from the firm-year list:
• new executive appears on the company’s 10K reports for at least 3
consecutive years.
• transition year : 1994 ~ 2003
• book assets of the firm in the transition year is > $500 million
• exclude financial firms (SIC=6000~6999) and foreign firms (American Deposit Receipts,Global
Deposit Receipts, and Canadian firms)
• Male-to-Male transitions: 1,750 cases , Male-to-Female transitions: 116 cases
• acquisitions and equity-debt offerings data:
• Securities Data Company (SDC) Platinum M&A Database
• SDC Platinum New Issues Database
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16. Summary
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= 43.1%
= 37.6%

17. Table2: Firm leverage, profitability, and size around executive transitions
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>

18. Table3: Probit regression of hiring a female executives
Female executives are more likely to
be hired from within and tend to be
younger in age.
Dependent variable :
• If transition firm hires a female
executive (CEO or CFO) =1
• zero otherwise

19. Managerial decision making
• Conducting difference-in-differences tests to evaluate whether
women make significantly different corporate financial decisions from
men.
• Sample:
• firm years three years before and three years after an executive transition
(exclude: transition year)
→ increase female sample size
→ mitigate serial correlation bias from DiD approaches
• have at least two years of financial data before the executive transition
• Main regression:
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20. Table4: Asset growth and capital structure decisions
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• Female executives increase the size of the firm at a significantly lower rate than men
• Women make fewer acquisitions than men
• firms with female executives grow more slowly, both internally and through external acquisitions, and are
consistent with male executives being more overconfident.

21. 2018/4/19
Table4: Asset growth and capital structure decisions

22. Table4: Asset growth and capital structure decisions
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• Females are associated with lower leverage
• average market leverage 2 % in the three years after a male-to-female transition.
• Female executives are less likely to issue debt.
• The gender of executive does not seem to make a significant difference.
X X
women are less likely to make significant corporate decisions, consistent with male
overconfidence

23. Announcement returns for major corporate decisions
• If male overconfidence leads to transactions being undertaken that
are negative net present value expect male executive firm
transactions to have worse market reactions than those of female
executive firms.
• Examine announcement returns in the 2 years after the transition
compared with 2 years before the transition.
• Table 5 : results from a DiD test for acquisition announcement returns
with control variables.
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24. Table5
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• Whether they are acquisitions or significant
capital market decisions, made by firms with
female executives more favorably than men.
• CONSISTENT : male overconfidence
Market views acquisitions made by
firms with female executives to be
more value increasing on average
Debt offerings are better received
if the firm has a female executive

25. Instrumental variable approach
• we estimate the following 2SLS model:
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Females make less acquisitions but they have better
acquisition announcement returns
Suggesting a strong relation between state-level gender
equality and having a female executive.

26. Additional tests of male executive overconfidence
• Shown that female executives undertake fewer significant financial
actions and that the market reacts more favorably to major decisions
made by firms with female executives.
• Earnings forecasts
• Career outcomes
• Stock purchases and stock option exercise
• Value destruction in acquisitions
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27. Table7: Earnings forecasts
• Firms with female executives are more likely to give a wider forecast
range.
• Male executives are overconfident relative to women.
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28. Table8: Career outcomes and stock option exercises
• Both female CEOs and CFOs are more likely to remain in their position for at least
four years.
• A female CFO is approximately 7.0% more likely to remain.
• Female executives have better career outcomes on average
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>
>
Examine the likelihood that an executive remains in her position for four
years after the date she is hired.
Consistent with a negative net loss to shareholders from male
executives being overconfident.

29. Table8: Career outcomes and stock option exercises
Definition:
• Holder 67 : executive holds company stock options that are 67% in the money.
• Long Holder : executive hold options all the way until expiration
• Net Buyer : executive buys shares in company stock despite already high
exposure to company risk.
• Men have higher values. Consistent with male executives being more
• overconfident.
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30. Table 9:
Value-destroying acquisitions
• Male executive firms will
undertake a higher percentage
of value-destroying acquisitions.
• Male to female: 1/21/3
• Men are more likely to conduct
value destroying acquisitions,
consistent with male
overconfidence.
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similar

31. Conclusion
THE FOURTH PART

32. Conclusion
• Women make different corporate financial and investment decisions
than men.
• Female executives: less likely to make acquisitions ,less likely to issue debt.
• Investors react more favorably to significant corporate financial decisions made
by female.
• Announcement returns : higher around acquisitions and debt offerings
when the firm has a female executive
• Consistent with men being overconfident
• Men provide narrower earnings forecasts
• less likely to exercise options early.
• more likely to execute value destroying acquisitions
• more likely to be removed from their position
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33. PPT prepared by Hsuan-Ling Chang
National Taiwan University