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When Women Are on Boards, Male CEOs Are Less Overconfident

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A number of governments (notably those in India, California, and parts of Europe) are pushing for greater female representation in the boardroom. And several studies suggest why: Having women on the board results better acquisition and investment decisions and in less aggressive risk-taking, yielding benefits for shareholders. What’s less clear is why these effects happen.

Our research suggests one potential reason: Having female board members helps temper the overconfidence of male CEOs, improving overall decision making for the company.

We were interested in studying overconfidence because prior research has shown that it can be detrimental to the firm and is more prevalent among male CEOs. Overconfidence leads CEOs to overestimate returns and underestimate risk, which can result in overinvestment and excessive risk-taking, destroying shareholder value. We were curious about how the board — which is responsible for supervising the CEO — might moderate a CEO’s tendency to get overconfident.

One benefit of having female directors on the board is a greater diversity of viewpoints, which is purported to improve the quality of board deliberations, especially when complex issues are involved, because different perspectives can increase the amount of information available. At the same time, research has found that female directors tend to be less conformist and more likely to express their independent views than male directors because they do not belong to old-boy networks. So a board with female directors might be more likely to challenge the CEO and push him to consider a wider range of options, as well as pros and cons, when making strategic firm decisions. This could then attenuate CEO overconfidence and correct for potentially biased beliefs.

To test this, we gathered data on 1,629 listed firms in the U.S., including data on their CEOs and boards, for the time period 1998 to 2013. During these years men were disproportionately represented among CEOs and board members. Women, on average, made up 10.4% of the board members and 2.9% of the CEOs in our sample. We examined whether CEOs were less likely to exhibit overconfidence when there were women on their board, and how this effect influenced corporate decisions and performance.

To assess overconfidence, we looked at CEOs’ option-exercise behavior. Unlike corporate decisions that reflect top management’s collective beliefs (such as whether to pursue a corporate strategy), the personal choice of holding or exercising vested options is likely to reveal a CEO’s individual beliefs and confidence about the company. We estimated CEOs’ level of overconfidence by calculating the “moneyness” of their stock option portfolios, or how much the stock price exceeds the exercise price for each year. Think about it this way: If a CEO is confident about the future performance of the firm, he’ll likely be more willing to hold onto his options, thinking he’ll profit from a future stock price appreciation. But if it’s already profitable to exercise those options because the market price is high, holding onto them could indicate overconfidence about the company’s prospects, especially if the anticipated future performance doesn’t materialize.


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