Sustainability, Asset Redeployability, and Board Gender Diversity

A vital yet surprisingly overlooked aspect of corporate sustainability is asset redeployability. Redeployable assets are those that can be used in several ways. Assets with high redeployability promote sustainability because they can be re-assigned for various purposes as circumstances change, reducing the need to create new assets and thereby conserving natural resources. This is akin to recycling.

In a new paper, we investigate how the gender of corporate board members affects their views of asset redeployability. Many shareholder activists and institutional investors believe that more gender diversity on the boards promotes sustainability. As a result, our research connects two critical sustainability issues: asset redeployability and board gender diversity. The importance of board gender diversity as public policy has been made clear recently by the enactment of a number of new laws. For example, on August 29, 2018, California legislators mandated that major publicly listed corporations in the state have at least one female director by the end of 2019 or face financial penalties. Numerous countries, including Australia, Belgium, France, Germany, Iceland, Italy, Norway, and Spain, have implemented laws mandating the representation of women on company boards.

As for asset redeployability, Kim and Kung (2016) have constructed a novel method of measuring it based on extensive data from the Bureau of Economic Analysis (BEA). Their redeployability score is defined mostly by the number of businesses and industries that employ a particular asset; the greater the number of businesses and sectors, the more redeployable it is. This unique measure is increasingly popular among researchers  and correlates with a number of significant corporate outcomes.

Our study uses the measure to demonstrates that more board gender diversity results in more redeployable assets. Men and women have distinct risk preferences, as shown by previous research, with female directors tending to take fewer risks. In general, assets that can be repurposed when circumstances change unexpectedly are less risky. Therefore, female directors likely view redeployable assets favorably. Thus, firms with a greater proportion of female board members have more assets that can be redeployed. Our results reinforce the findings in the literature that female directors exhibit significantly lower risk tolerance than their male counterparts.

To reduce endogeneity, we conduct a number of robustness tests, including propensity score matching (PSM), an instrumental-variable analysis employing three alternative instrumental variables, and Oster’s (2019) approach for assessing coefficient stability. All robustness checks support the conclusion that there is a large increase in assets that can be redeployed when there are more women on a board. Consequently, our findings are presumably not contaminated by endogeneity and likely indicates a causal impact.

Furthermore, we examine the critical mass theory in connection with the gender diversity of the board. This notion posits that the effect of female directors may not become obvious until a specific number have been appointed. Prior research indicates that the board must include at least three female directors for the group to have a strong enough voice. However, our findings contradict the prediction of the critical mass theory. We do not find that the effect of board gender diversity becomes more evident once a particular threshold of female directors is reached.

The implications of our study’s findings are extensive. First, shareholders and investors who are concerned with the level of business risk-taking should find our findings useful, as we demonstrate that the degree of firm risk, as measured by asset redeployability, is considerably affected by board composition, in particular board gender diversity. Regulators and legislators should also find our findings valuable, since our conclusion suggests that any law imposing a female quota on corporate boards could have a substantial impact on the asset structure of the organization. Corporate executives would benefit from our findings as well because they are aware of the psychological biases favoring reduced risk-taking when there are more female members on the board and may formulate corporate policy accordingly. Moreover, our findings indicate that female directors support sustainability since they view asset redeployability favorably and advocate it. Finally, our research adds to the body of knowledge in psychology that men and women have different risk preferences. We show that this is the case.

REFERENCES

Kim, H., & Kung, H. (2016). The Asset Redeployability Channel: How Uncertainty Affects Corporate Investment. Review of Financial Studies, 30(1), 245–280. https://doi.org/10.1093/rfs/hhv076

Oster, E. (2019). Unobservable Selection and Coefficient Stability: Theory and Evidence. Journal of Business & Economic Statistics, 37(2), 187–204. https://doi.org/10.1080/07350015.2016.1227711.

This post comes to us from Thunyanee Pothisarn at the National Institute of Development Administration (NIDA) – NIDA Business School, Pattanaporn Chatjuthamard at Sasin GIBA, Pornsit Jiraporn at Pennsylvania State University, and Suwongrat Papangkorn at Thammasat University. It is based on their recent article, “Sustainability, Asset Redeployability, and Board Gender Diversity,” available here.

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