Gender quotas and accounting conservatism: evidence from California Senate Bill 826

Purpose In recent years, demand for improved female representation on corporate boards has grown remarkably, sparking debates about the effectiveness of gender quota mandates. This paper aims to investigate the impact of California Senate Bill 826 (SB-826) on accounting conservatism, a longstanding pillar in financial reporting and a direct manifestation of risk-taking in accounting practices. Design/methodology/approach We employ a difference-in-differences methodology, with the firms headquartered in California serving as the treatment group and those headquartered in Texas as the control group. Both groups are highly comparable in terms of market size and industry composition. Findings We find that the implementation of SB-826 triggered a decrease in accounting conservatism among California-headquartered firms, suggesting a shift towards less risk-averse financial reporting practices. Our results are driven by non-compliant firms that appointed rookie female directors following SB-826. In contrast, compliant firms hiring seasoned female directors exhibit higher accounting conservatism post SB-826, suggesting that our findings are instigated by the imposed disruptions to board equilibria rather than the mere addition of female directors. Originality/value Our results contribute to the ongoing discourse on board mandates and gender diversity by highlighting the unintended consequences of such mandates. Our findings suggest that imposing a uniform gender quota without considering the dynamics of the labor market for female directors may result in less experienced boards and a nurturing environment for opportunistic managers. Policymakers and practitioners must carefully consider the broader implications of implementing regulatory mandates and their potential trade-offs.