In a new paper, we examine whether the gender composition of companies’ boards affects the Securities and Exchange Commission’s (SEC’s) decision to investigate those companies and, ultimately, to pursue regulatory enforcement.
We consider three related reasons why firms with more women on their boards may face less SEC scrutiny. First, prior research suggests that female directors are associated with stronger monitoring, less risk-taking, and higher-quality financial reporting. Consistent with this view, we find that firms with more female directors have fewer red flags, including restatements, securities litigation, and extreme decreases in stock prices. Second, regulators may view greater female representation as a signal of stronger governance, particularly when they must allocate limited enforcement resources across many firms. Finally, SEC leaders’ public encouragement of gender equality may prompt them to give more diverse firms less scrutiny.
Our results suggest a strong negative relation between female board representation and the opening of SEC investigations. Companies with at least 35% female directors are investigated 26% less often than the average of all companies.
Identification
A central challenge is that firms do not randomly choose the gender composition of their boards. Firms with more female directors may also differ in ways that are difficult to observe, such as in their corporate culture or broader governance practices, which could themselves be affected by SEC scrutiny. To address this concern, we use the 2017 board-diversity campaigns of BlackRock, State Street, and Vanguard. These institutional investors encouraged portfolio companies to increase female board representation, and the pressure was greater at firms in which the Big Three held larger ownership stakes. We find that the decline in SEC investigations is concentrated among firms that were most exposed to these campaigns, particularly firms that had limited female representation before the campaign. This pattern suggests that increases in female board representation contribute to a lower likelihood of SEC investigation.
Enforcement
Additionally, we examine whether board gender diversity is related to what happens after the SEC opens an investigation. Firms with greater female board representation are less likely to experience an SEC violation and less likely to face a formal enforcement action. These patterns are strongest among firms with a critical mass of female directors, defined as at least 35% of the board.
Firms’ Responses
We also find that firms adjust their boards after an SEC investigation begins. Following an investigation, firms are 17.6% more likely to appoint a female director and 7.2% more likely to see a male director leave the board. These changes are consistent with firms viewing female directors as bringing expertise that is particularly valuable during an investigation. They may also reflect an effort to signal stronger corporate governance in response to regulatory scrutiny. Our analysis cannot distinguish between these explanations.
Why Diversity Matters
Our evidence is consistent with a finding that stronger governance and regulatory perceptions playing a role. Female directors are more likely to serve on audit committees and to have monitoring experience , suggesting that they often take on supervisory roles. Firms with more female directors are also less likely to show red flags that may attract SEC attention, including earnings restatements, securities class action lawsuits, and very poor stock performance.
At the same time, monitoring expertise does not fully account for the relation we document. Female directors both with and without observable monitoring experience are associated with fewer SEC investigations. This pattern suggests that female directors may bring valuable qualities to the board that are not fully captured by measurable professional skills.
Because SEC leaders set the agency’s enforcement priorities, their beliefs and ideology likely influence the priorities they set. We therefore examine whether their views on gender diversity are related to which firms the SEC investigates. To capture the ideology of SEC leadership, we analyze public speeches by SEC chairs and commissioners and identify periods in which their speeches place greater emphasis on gender and diversity. We find that during these periods, the negative relation between female board representation and SEC investigations is stronger, suggesting that regulators’ views on gender diversity may also contribute to the lower likelihood of investigation for firms with more women on their boards.
Our results have implications for boards, investors, and regulators. We show that board gender diversity affects both the conduct that attracts regulatory scrutiny and regulators’ assessments of these firms. At a broader level, board composition can affect a board’s relationship with its regulator.
Yang Bai is an assistant professor of finance at California State, Fullerton; Fred Bereskin is an associate professor of finance at the University of Missouri; Xiaohu Guo is an assistant professor of finance at the College of Charleston; and Miriam Schwartz-Ziv is an associate professor of finance at Hebrew University of Jerusalem. This post is based on their recent paper “Does Board Gender Diversity Temper Regulatory Enforcement?” available here.