Does board gender diversity improve stock liquidity?
Authors: Li Ziqian , Cotton Deborah , Walsh Kathleen , Xu Jing 
Published: October 2024

Purpose

Firms with gender diverse boards have been shown to have increased transparency and disclosure, resulting in reduced information asymmetry, which is a key factor influencing stock liquidity. This paper explores the influence of information asymmetry resulting from board gender diversity on stock liquidity. We examine the impact of gender diverse firms on stock liquidity in US listed firms from 2006 to 2022, capturing 28,280 firm-year observations across 4,349 firms. Using mediation models, we distinguish between direct and mediated effects to examine the impact of gender diverse boards on three dimensions of stock liquidity. We find a positive and significant relation between board gender diversity and stock liquidity, and our findings highlight the substantial mediating role of information disclosure in this association. To address concerns of endogeneity, we use instrumental variables regression, and our conclusions remain robust to a range of alternatives.

Design/methodology/approach

To investigate the association between board gender diversity and stock liquidity and the underling mechanism that drives the relation, we utilize a dataset comprising 4,349 listed US firms from 2006 to 2022. We adopt a comprehensive approach to measure stock liquidity that spans three dimensions: Amihud illiquidity (LIQ) as a representation of price impact, the quoted spread (SPREAD) to gauge transaction costs and the stock turnover (TURNOVER) to assess trading frequency. To evaluate board gender diversity, we examine female directors and female independent directors, utilizing both the percentage and the presence (as a binary variable).

Findings

The results of our analysis reveal not only a statistically significant effect of board gender diversity on liquidity but also demonstrate its economic significance. One standard deviation increase in the percentage of female directors (12% more female directors) is associated with a 5.8% decrease in price impact, a 5.1% reduction in transaction costs and a 3% increase in trading frequency. These findings highlight the material economic importance of the relationship, which stands in contrast to previous studies reporting only a 1% change in average stock liquidity in the Australian stock markets (Ahmed and Ali, 2017). To further investigate the underlying mechanism driving the association between board gender diversity and liquidity, we employ mediation models to separate the direct and mediated channels. Our results indicate that the effects of the percentage of female directors are mediated on liquidity (LIQ, SPREAD, and TURNOVER) through information disclosure, albeit with a relatively small magnitude (mediation proportion is 18.2, 3.9 and 22.9%, respectively).

Research limitations/implications

We include a comprehensive set of variables in our analysis and adopt an instrumental approach to mitigate endogeneity concern. However, we acknowledge the possibility of omitted variable biases or reverse causality in our empirical analysis.

Practical implications

Our study contributes to the understanding of the association between board gender diversity and stock liquidity, focusing on the underlying mechanisms. Gender diversity on boards enhances corporate governance, leading to reduced managerial opportunism (Adams and Ferreira, 2009; Nielsen and Huse, 2010). This, in turn, increases information transparency and results in increased stock liquidity. By exploring the empirical evidence of the impact of gender diverse boards on stock liquidity through the information channel, we provide valuable insights to the existing literature. Our study uses US data to examine this association, addressing the small sample concerns of prior research that may have contributed to inconsistent findings.

Social implications

This research can drive both economic and social transformations as it provides evidence that gender diverse boards lead to improved market outcomes.

Originality/value

Our study differs from previous research by incorporating all three dimensions of liquidity, ensuring a comprehensive analysis. Through our investigation, we aim to deepen understanding of how gender diversity on corporate boards shapes market dynamics and contributes to understanding of corporate governance and market efficiency. Our study investigates how the impact occurs by employing mediation models to separate the direct and mediated channels of impact. We show that the effects of gender diverse boards on liquidity are mediated through information disclosure.