An estimate by John B. Henry in the Metropolitan Corporate Counsel (February 2008, p. 28) suggests that the annual direct litigation cost of Fortune 500 companies was a whopping $210 billion in 2006, i.e., about one-third of their after-tax profits that year. Apart from direct litigation cost, lawsuits also hurt firms’ reputations. Not surprisingly, companies lose significant market values upon the filing of lawsuits against them. Given the substantial impact of litigation, it is surprising that little research has been done to identify the determinants of various types of lawsuits against firms. Our paper aims to fill this gap by examining the relation between gender diversity in top management and the number of lawsuits filed against a firm. Prior studies find that women tend be more risk-averse, less overconfident, and more law-abiding than men. Accordingly, we examine whether the presence of more women in the top management team leads a firm to face fewer lawsuits.
Our sample spans from year 1996 to 2010 and covers firms in the S&P 1500 group in the year 2005. We hand-collect a novel dataset on different categories of corporate lawsuits. We measure gender diversity as the ratio of women among the top five managers of a firm. As expected, we find a negative relation between gender diversity and the number of lawsuits a firm faces. In particular, we estimate that a one standard deviation increase in the proportion of female executives in the top management team leads to an average decrease of slightly more than one lawsuit per year. This effect is economically significant given that the mean annual number of lawsuits faced by a firm is 2.37. This negative relation holds for most types of lawsuits we analyze, including lawsuits related to product liability, environment, medical liability, labor/pension, contracts, and intellectual property.
One challenge to establishing a causal relation between gender diversity and lawsuits against firms is that female representation in top management is not random. For example, it is possible that women self-select into firms which are less likely targets of litigation. Similarly, firms that face greater litigation risk may avoid putting women in top management positions due to reservations about women’s ability to handle litigation. To deal with such endogeneity concerns, we employ the variation in the supply of female labor force across states induced by World War II, and a state-level gender equality index as instrumental variables. Results from our instrumental variable techniques point to a causal effect of gender diversity on lawsuits against firms.
We also examine a financial implication of the effect of gender diversity on lawsuits, and find that greater female representation in top management leads to a higher value of cash in firms that are more susceptible to lawsuits. Among firms with high litigation risk, a firm with the mean fraction of women in top management enjoys 7 to 8 cents higher market value per dollar of cash it holds, compared to a firm without female top executives.
Our research contributes to at least two strands of the literature. First, we contribute to the literature on corporate litigation. Scant research examines the underlying causes of corporate litigation, especially lawsuits not related to securities. We help fill this gap by examining the effect of gender diversity on a variety of lawsuits faced by a firm. Second, this study contributes to the growing literature on gender diversity and corporate policies and performance.
Overall, our paper sheds light on an important and previously unidentified benefit of gender diversity in the top management team. The full paper is available for download here.
This post comes to us from Binay K. Adhikari, Visiting Assistant Professor of Finance at Miami University, Farmer School of Business; Anup Agrawal, Powell Chair of Finance at the University of Alabama, Culverhouse College of Business; and James Malm, Assistant Professor of Finance at the College of Charleston, Department of Finance. The post is based on their recent paper, which is entitled “Do Women Stay Out of Trouble? Evidence from Corporate Litigation” and is available here.