Institutional Shareholders, Board Gender Diversity, and Firm Performance

ABSTRACT My research examines the relationship between two important methods of governance, specifically, institutional ownership and the presence of women on the board of directors. I examine two hypotheses, namely, the stealth‐trading and political attention hypotheses, by employing fractional logit models and zero‐inflated Poisson models. The analysis is conducted on a dataset consisting of 480,780 observations from 2000 to 2018. I find a negative relation between the shares held by institutions and the number of female directors on the board. This supports the stealth‐trading hypothesis. Moreover, I find that public pension funds have a beneficial influence on the presence of female directors, which aligns with the political attention hypothesis. Public pension funds may promote their political agenda by endorsing board gender diversity. Institutional investors with long‐term investment strategies, such as dedicated institutions and quasi‐indexed funds, play a beneficial role in increasing the representation of women on corporate boards. These institutions are expected to appeal to investors that prioritise social responsibility. Female directorships favourably influence the return on assets and Tobin's Q, but an unfavourable influence on market‐adjusted stock return and excess asset return. I find a positive relation between institutional ownership and firm performance when there are few female directors, but a negative relation when there are more female directors, consistent with the critical mass theory in that having more female directors in the firm leads to a greater amount of information being shared, in line with the stealth‐trading hypothesis.