Women on board and the cost of equity: the mediating role of information asymmetry

Aitzaz Ahsan Alias Sarang · Asad Ali Rind · Mamdouh Abdulaziz Saleh Al‐Faryan · Asif Saeed

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Gender Diversity and Inequality Corporate Finance and Governance Gender Politics and Representation

Abstract

Purpose This study aims to examine whether information asymmetry (IA) mediates the relationship between women directors and the cost of equity (COE). Specifically, this study posits that women directors tend to lower the COE through the channel of IA. Design/methodology/approach This study uses the US-listed firms’ data from 2002 to 2014, comprising 11,189 firm-year observations. This study measures the COE by aggregating the four unique market-based COE models and apply pooled ordinary least square to estimate our results. Findings This study documents that women directors are linked to IA, and that IA is linked to the COE. Furthermore, in the mediation test, IA fully mediates the relationship between women directors and the COE. This study's results also validate the critical mass hypothesis, as the IA shows full mediation between the critical mass of women directors and COE. This study also discusses the limitations and major implications of the results along with possible future directions. Social implications This study also supports the positive role of females in improvising the economic performance of the firms and supporting the sustainable development goals-5 (gender equality). Originality/value The originality of this study lies in its theoretical as well as empirical contributions. First, this study follows the line of inquiry of the mediation analysis, thereby contributing by examining whether the relationship between women directors and financial value, i.e. COE, is indirect. Second, in addition to ex post measures of the COE, this study used four ex ante unique market-based models to measure the COE. Most of the prior studies just rely on book-based measures or use a single market-based mode. Third, the findings contribute insights into how women directors add value and benefits firms.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1983Separation of Ownership and Control 1992The Cross-Section of Expected Stock Returns 2014A five-factor asset pricing model 1997Industry costs of equity 2009Women in the boardroom and their impact on governance and performance☆2007Upper Echelons Theory: An Update 1991Disclosure, Liquidity, and the Cost of Capital

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