Pacific Accounting Review

Emerald Article: Female directors and earnings management in

high-technology firms
Ilanit Gavious, Einav Segev, Rami Yosef

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To cite this document: Ilanit Gavious, Einav Segev, Rami Yosef, (2012),"Female directors and earnings management in
high-technology firms", Pacific Accounting Review, Vol. 24 Iss: 1 pp. 4 - 32
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PAR
24,1 Female directors and earnings
management in high-technology
firms
4
Ilanit Gavious
Guilford Glazer Faculty of Business and Management, Ben-Gurion University,
Beer-Sheva, Israel
Einav Segev
Department of Social Work, Sapir Academic College, D.N. Hof Ashkelon,
Israel, and
Rami Yosef
Guilford Glazer Faculty of Business and Management, Ben-Gurion University,
Beer-Sheva, Israel

Abstract
Purpose – This study, based on a merger of gender and accounting theories, aims to explore whether
and how earnings management is affected by the presence of female directors on the board of directors
and on the audit committee.
Design/methodology/approach – The study employs both a univariate and multivariate analysis
approach to explore the relation between female directors and earnings management in
high-technology firms. In the analysis, two contemporary ex-post measures of earnings
management, discretionary accruals and nonoperating accruals, as well as two ex-ante measures of
earnings management, Big4 auditor and financial leverage are applied.
Findings – The paper finds evidence for a negative relation between the presence of female directors and
earnings management. The findings indicate that accounting aggressiveness is affected by the proportion
of women on the board of directors as well as on the audit committee. Furthermore, the paper find evidences
indicating that earnings management is lower when either the CEO or the CFO is a woman. Notably, in
firms with a higher female representation in corporate governance and/or in top management, external
monitoring by auditors and creditors seems to be weaker, yet earnings quality is higher. Additional
analysis suggests that the gender of directors has value implications for analysts and investors; specifically,
there is a positive relation between the proportion of female directors and the firm’s value. The findings are
supported by several gender theories and findings regarding women’s motivation and achievement, moral
values, social stereotypes and the relation between task performance and self-confidence.
Originality/value – This study associates the gender of directors with earnings management by
firms. The study contributes to the growing body of literature on earnings management. It should be
useful to researchers, regulators, investors, analysts and creditors as well as other players in the
capital markets, as it presents a new and important aspect that needs to be accounted for when
assessing the quality of firms’ accounting information.
Keywords Earnings management, Earnings quality, Gender, Women’s motivation, Boards of directors,
Corporate governance
Paper type Research paper
Pacific Accounting Review
Vol. 24 No. 1, 2012
pp. 4-32 The authors gratefully acknowledge the financial support of The Marc Rich Foundation for the
q Emerald Group Publishing Limited
0114-0582
Promotion of Female Researchers, and the Guilford Glazer Faculty of Business and Management
DOI 10.1108/01140581211221533 at Ben-Gurion University.
1. Introduction Female directors
Revelations of massive accounting frauds involving large corporations (e.g. Enron) and earnings
have drawn growing academic attention to the incentives of managers to manage
earnings. While the evidence on capital market motives for earnings management is
abundant, the academic literature on the relationship between earnings management
and the gender of the firm’s directors is scarce. Notably, such research requires gender
theories to be incorporated into the accounting discipline. The gender perspective may 5
increase understanding of the motives for and the extent of engaging in accounting
manipulation. The claim at the heart of this perspective is that gender has implications
for engaging in certain behaviors and abstaining from others due to role expectations
associated with gender. Markedly, a gender-based explanation will clarify the
socio-cultural context against which decisions are made within the organization.
In this study, we associate earnings management by high-technology firms with the
gender of its directors. Specifically, we seek to explore the effect of the presence of
female directors on the board of directors (henceforth BOD) and on the audit committee
on earnings management. This allows us to corroborate evidence from the BOD setting
with evidence from the audit committee setting, both of which are instrumental in
overseeing management in order to control opportunistic management behavior such
as earnings management. In an additional analysis, we test the effect of chief executive
officer (CEO)/chief financial officer (CFO) gender on earnings management. We
differentiate between independent directors and executive managers because earnings
management may be conducted by executive managers (CFO and CEO in particular),
but it should be detected and deterred by independent directors.
The study uses a sample of Israeli high-technology firms listed in the USA (traded on
the NYSE or the NASDAQ) between 2002 and 2009. The Israeli case is particularly
interesting since up until only a few years ago, women in Israel were virtually
unrepresented on company boards[1]. Currently, the proportion of women on the boards
of public companies in Israel is around 15 percent, similar to that in the USA. For
comparison, the proportion of women on the boards of public companies around the
world is: 7.8 percent in Germany, 10 percent in Spain[2], 11.5 percent in the UK, 12 percent
in The Netherlands, 13 percent in Canada, 18 percent in Denmark, 26 percent in Finland,
27 percent in Sweden, and 44 percent in Norway (Bermig and Frick, 2010; Adams and
Ferreira, 2009; Catalyst, 2009). The high percentage of female board members in Norway
is due to its quota system. Thus, the issue of the impact of female directors on earnings
quality, and whether female representation on company boards should be increased in
general, and by law in particular, is also relevant for the USA as well as most European
countries (Srinidhi et al., 2011).
The Israeli Government is currently promoting a bill that will increase the
representation of women on the BODs of public companies. The purpose is to force
companies to appoint a specific number of women to their BODs, such that women
would constitute approximately 50 percent of board members[3]. Furthermore,
companies will be obligated to publish information related to the integration of women
in the company[4].
In the study, we focus on high-technology firms. Sample homogeneity is particularly
germane in the context of our study, as firms are subject to different
earnings-management incentives due to regulation or other industry-specific factors.
For example, financial firms are subject to earnings-management incentives that are
PAR more complex due to regulation and other factors (Burgstahler and Eames,
24,1 2003; De Franco et al., 2011). Additionally, different industries differ in key attributes
such as R&D intensity, profit margins, growth prospects, financial risks, reliance on
collaboration with other companies and lifecycle stage, which also potentially
affect earnings-management incentives and value implications of earnings
management. Hence, our study, dealing with management intent and inadequate
6 oversight in reporting biased earnings results, requires a homogeneous group of firms.
The restriction to high-technology companies ensures that our sample consists of a
sufficiently large and fairly homogeneous sample.
The high-tech sector also makes an interesting case for studying female directors’
behavior, as this sector is characterized by challenges, frequent change and ongoing
uncertainty. According to gender literature, we are dealing with women who have
shattered the “glass ceiling” and worked their way into positions that require skills,
behavior and a degree of risk-taking that was previously related to men (Jenkins, 1987;
Morrison et al., 2004). The literature indicates that these women have broken down the
cultural barriers by proving that women can also serve in high-ranking positions.
Notably, in the study we show that the representation of female directors on the boards
of Israeli high-tech firms has reached the average level in Israel – about 15 percent.
In the analysis, we apply two contemporary measures of earnings management:
discretionary accruals and nonoperating accruals. Discretionary accruals are from the
widely applied modified Jones (1991) model, augmented to control for the impact of firm
performance on accruals (Kothari et al., 2005) and for growth (McNichols, 2002).
Nonoperating accruals are as described by Givoly and Hayn (2000). This measure serves
as an alternative proxy for earnings management, which avoids empirical concerns
regarding the Jones model (Dechow et al., 1995; Erickson and Wang, 1999). Following
prior research (Aboody et al., 2005; Raman and Shahrur, 2008), we use the absolute value
of discretionary, as well as nonoperating, accruals to estimate the magnitude of earnings
management. We define our calculated abnormal accruals measures to be ex-post
measures of earnings management. Next, we identify the existence of a Big4 auditor and
the degree of firm leverage as ex-ante measures of earnings management, based on the
conjecture that improved external monitoring will reduce both the bias and noise in
reported earnings (Francis et al., 1999; Yu, 2007).
Employing both a univariate and multivariate analysis approach, we find evidence for
a negative relation between the proportion of female directors and earnings management.
The effect of the presence of women on the audit committee is similar to that on the BOD.
The findings imply that female directors improve board monitoring as they constrain
earnings management more than their male counterparts[5]. Alternatively, it may be that
firms employing a larger number of women in top management and/or governance
positions are, at the outset, firms with a higher awareness of the need for balance in
business, they maintain higher social, environmental, legal and ethical standings, and
they care about how they are perceived by the public. In these firms, higher quality
earnings may be a direct result of the higher standards the firm holds as an entity.
Nonetheless, the relation between the social, environmental, legal, ethical and moral
standings of a firm, and the presence of women in high positions, together with the
quality of earnings, need to be further explored in future research.
We also find evidence indicating that earnings management is significantly lower
when either the CEO or the CFO is a woman[6]. Furthermore, we find that in firms with
a higher female representation in corporate governance and/or in top management, Female directors
external monitoring by auditors and creditors is weaker, yet earnings management is and earnings
lower. A possible interpretation of this seeming conundrum is that the presence of
women serves as internal monitoring. Finally, additional analysis suggests that the
gender of directors has value implications for analysts and investors; specifically, there
exists a positive relation between the proportion of female directors and the firm’s value.
Our findings are supported by the gender literature, which indicates a tendency towards 7
conciliatory behavior by women in high-pressure situations compared to dictatorial-type
behavior by men. These studies claim that, in fact, women complement men in
management and bring a healthy balance to business (Malach Pines, 1989; Morrison et al.,
2004). The findings are also consistent with studies showing that female managers tend to
take fewer risks than male managers (Powel and Ansic, 1997; Barber and Odean, 2001).
Gender theory also suggests that women will not undertake a task – even if they anticipate
success at it – unless they value it morally (Eccles, 1994). Furthermore, studies relating
gender to ethical values theorize women to be more ethical in their judgments and
behaviors than men (O’Fallon and Butterfield, 2003; Vermeir and Van Kenhove, 2007), and
thus more likely to report illegal acts (Miethe and Rothschild, 1994) and fraudulent financial
reporting (Kaplan et al., 2009). Additional studies, focusing on female directors, show that
the presence of women improves the functioning and efficiency of the BOD as well as the
firm’s performance and value (Huse and Solberg, 2006; Adams and Ferreira, 2009;
Campbell and Minguez-Vera, 2008). Hence, gender-based differences, fear of negative
results due to misrepresentation of earnings and moral considerations, among other things,
may offer an explanation for the findings that female executives abstain from, and female
directors constrain and deter, earnings management more than do men. If female directors
have an effect on their male counterparts, as documented in the gender literature, the
overall reaction of the board can be affected by the women present, who will “raise the flag”
of morality, strengthening the firm’s internal monitoring by putting a heavier weight on the
ethical considerations in the board’s decisions.
The economic implication of our findings is that a regulatory move to increase the
representation of women on corporate BODs may lead to a business world where the
levels of fair disclosure and quality of earnings are higher. Furthermore, our study has
a practical implication in that if the issue of the appropriate representation of women
on BODs is related to the quality of financial reporting of companies, then it is part of
the public interest; as such, it merits the oversight of the regulator.
The study contributes to the growing body of literature on earnings management. It
should be useful to researchers, regulators, investors, analysts and creditors as well as
other players in the capital markets, as it presents a new and important aspect that
needs to be accounted for when assessing the quality of firms’ accounting information.
The paper proceeds as follows. Section 2 contains our literature review. Section 3
describes our sample and presents our earnings management metrics. Section 4
discusses our research methods and results. Section 5 presents some additional analysis
of the valuation implications of the presence of female directors. Section 6 concludes.

2. Literature review
2.1 Earnings management literature
Earnings management is the practice of making discretionary accounting choices to
achieve a desired level of reported earnings. A vast body of literature exists
PAR on the incentives for earnings management. Nonetheless, it is only during the last
24,1 decade that a strand of earnings management literature has developed, linking
corporate governance and accrual manipulation. These studies generally document
that the magnitude of accrual management is negatively associated with proxies of
effective corporate governance such as board independence and audit committee
independence (Klein, 2002; Xie et al., 2003; Benkraiem, 2009; Lin and Hwang, 2010).
8 Additional studies present a negative relationship between earnings management and
the BODs as well as the audit committee’s size, expertise and the number of meetings;
and a positive relationship between earnings management and the audit committee’s
share ownership (Lin and Hwang, 2010).
The few studies that relate earnings management to gender focus mainly on the
gender of executive managers rather than on the gender of independent directors. For
example, Krishman and Parsons (2008) show that the higher the proportion of female
managers in a firm’s executive management, the higher earnings quality is. Peni and
Vahamma (2010) focus on CEOs and CFOs and find that female CFOs in US firms tend to
be more conservative with respect to choice of accounting techniques and strategies.
Nonetheless, they do not find evidence for a relationship between earnings management
and the gender of the firm’s CEO. Consistent with Peni and Vahamma (2010) and Wei
and Xie (2009) show that female CFOs in Chinese firms are less aggressive in earnings
management. Jiang et al. (2010) find evidence that a firm’s CFO has a bigger influence on
the extent to which earnings are managed than does the CEO. Schrand and Zechman
(2011) relate a manager’s propensity to commit fraud in financial reporting to
managerial overconfidence. With respect to gender, Schrand and Zechman indicate that
men are expected to be more over-confident than women in general, and in investment
decisions in particular. However, they find limited evidence that gender is associated
with the likelihood of committing fraud. In contrast to these studies, our study focuses on
the role of board members critical to the governance of a firm, which is very different to
that of a manager[7].

2.2 Gender literature

Gender literature discusses the unique attributes of women in senior executive positions
(Offermann and Armitage, 1993). It primarily asserts that the behaviors of women and
men in the workplace are the result of social learning and are no different than the
general cultural norms. The social norms with respect to women are different than those
for men, and this is reflected in the workplace. Therefore, women in managerial positions
often experience ambivalence and conflicts that men do not have to face. For example,
studies (Hyde and Kling, 2001; Powell, 1988) have shown that women have different
expectations of work; women view work as a source of personal development and
self-fulfillment, while men are educated to view a career as a means of moving up in the
hierarchy and a means of securing compensation. Powell (1988) argues that the gender
differences found in management are based on stereotypes. He found that female
managers are highly motivated managers and are just as dedicated as men. However,
women are less concerned with economic profit (Betz et al., 1989). Additional studies
(Malach Pines, 1989; Morrison et al., 2004) show that in high-pressure situations men
may behave in a more dictatorial manner, while women tend to be more conciliatory. As
opposed to men, the more senior their managerial position, the less support women have
in the workplace, and they therefore tend to avoid high-pressure events at work.
Morrison et al. (2004) claim that the currently accepted assertion is that differences Female directors
between men and women contribute to the organization, as women complement men in and earnings
management and bring a healthy balance to business.
Unique gender characteristics can be seen in decision-making and risk-taking. The
literature indicates that women tend to take fewer risks than men (Powel and Ansic,
1997; Barber and Odean, 2001), as women are given less room to err and express
weakness. Another important aspect in this regard is the motivation to achieve. 9
According to McClelland (1966, p. 481), “Clearly we need a differential psychology of
motivation for men and women”. Studies have shown that compared to men, women fear
or avoid success (Mednick, 1989)[8]. Eccles (1994) also points to gender differences in
expectations for success. An important factor in Eccles’ model is the subjective value of
the task. This parameter indicates that even if women expect to succeed, they will not
undertake a task if they do not value it morally. Recent literature relating gender to
ethical values theorizes females to be more ethical in their judgments and behaviors than
males (Collins, 2000; O’Fallon and Butterfield, 2003; Vermeir and Van Kenhove, 2007;
Kaplan et al., 2009). Miethe and Rothschild (1994) contend that females feel greater public
responsibility to speak out against wrongdoing and are thus likely to report questionable
or illegal acts more frequently than males. Kaplan et al. (2009) find that females are more
likely to report fraudulent financial reporting. Based on these findings, in the context of
the current study, the presence of women on the BOD as well as on the audit committee
will constrain manipulation in earnings due to the moral/ethical issues involved.
The findings in the literature with respect to female directors indicate that female
directors improve a board’s functioning and efficiency as well as a firm’s performance.
For example, Fondas and Sassalos (2000), Huse and Solberg (2006), and Srinidhi et al.
(2011), argue that female directors may improve a board’s decision-making, behavior
and effectiveness. This is due to women bringing different perspectives and opinions
into a discussion (Fondas and Sassalos, 2000); women being exposed to different
experiences than men due to different socialization processes (Srinidhi et al., 2011;
Hillman et al., 2007; Ambrose and Schminke, 1999); or because female directors tend to
be better prepared for the board meetings than men (Huse and Solberg, 2006). Adams
and Ferreira (2009) find that female directors have a significantly positive impact on
“board inputs and firm outcomes.” They show that female directors have better
attendance records at board meetings than men, and that they improve the attendance
record of male directors as well. Additional studies examined the relation between
gender diversity on the board and firm performance. These studies generally indicate
that gender diversity is associated with improved financial performance and higher firm
value (Erhardt et al., 2003; Carter et al., 2003; Farrell and Hersch, 2005; Campbell and
Minguez-Vera, 2008). Erhardt et al. (2003), for example, relate these findings to gender
diversity leading to a wider knowledge base. Srinidhi et al. (2011) present evidence that
female directors improve earnings quality. The inferences from the literature on female
directors seem to be consistent with those found for female managers with respect to
women having higher ethical standards and greater risk aversion than men, playing
more by moral considerations than by considerations of self-achievements,
complementing men in management and bringing a healthy balance to business. All
of these are consistent with the expectation that the presence of female directors will
improve board monitoring and oversight (Terjesen et al., 2009) in terms of preventing or
correcting opportunistic behavior such as earnings management.
PAR We point out that the findings from the gender literature which indicate that women
24,1 have a tendency towards conciliatory behavior in high-pressure situations do not
necessarily imply that female directors will automatically agree with the majority of
male directors. Rather, the presence of women on the board can create a conciliatory
atmosphere and increase the sense for moral considerations and ethical standings;
hence, female directors may influence – rather than be influenced by – their male
10 counterparts, again consistent with the findings that demonstrate that women
complement their male counterparts and bring a healthy balance to business.

3. Data and earnings management metrics

We obtain financial as well as non-financial information for Israeli high-technology
firms listed in the USA between 2002 and 2009. All firms report their financial
statements in accordance with US Generally Accepted Accounting Principles. The case
of the Israeli high-tech sector is unique and germane, as Israel is ranked among the
leading countries to go IPO on NASDAQ (Avnimelech and Teubal, 2006). Previous
studies have found that the emergence of the venture investment industry in Israel is
considered to be the most successful instance of diffusion of the Silicon Valley model of
venture capital outside of North America (Avnimelech and Teubal, 2004a, b;
Bresnahan et al., 2001; Carmell and De Fontaenet, 2004). Notably, the portion of venture
investments as a share of GNP in Israel is the highest in the world (Avnimelech, 2008;
NVCA, 2007; EVCA, 2007) (NVCA – National Venture Capital Association, www.nvca.
org; EVCA – European Venture Capital Association, www.evca.com). The Israeli
context is also germane with regard to the representation of women on BODs.
Specifically, Israel is undergoing a legislative process designed to increase the
proportion of women on the BODs of public companies to about 50 percent,
acknowledging the positive correlation between female presence on the BODs and the
quality of business results and financial reporting.
The list of Israeli high-technology firms during the sample period is obtained from
the Israel Venture Capital (IVC) online database. The IVC online database is a
comprehensive database on Israel’s high-tech industry created by the IVC Research
Center. We extract market prices as well as analysts’ target prices for the firms’ shares
from The Marker database. The following information was extracted from the Yif’at
Capital Disk Co. database: accounting information from the firm’s financial statements,
the company’s audit firm, management and corporate governance information
required for our analyses, and the firm’s industrial affiliation. Although the Yif’at
Capital Disk provides a comprehensive set of selected information to satisfy the needs
of researchers and practitioners, in cases where data were missing, we complemented it
from the databases of Dun and Bradstreet (D&B) and from the SEC filings of the
firms[9]. Our sample is composed of firms from four high-technology industries:
(1) software systems and devices;
(2) electronics;
(3) electrics and optics; and
(4) chemicals and pharmaceuticals.

In our analysis, we apply two contemporary measures of earnings management,

discretionary accruals measure and nonoperating accruals measure (Geiger et al., 2005).
We require that minimum discretionary accruals and minimum nonoperating accruals Female directors
for our sample firms be higher than 1 percent of total assets, the same scale of managed and earnings
accruals required in Balsam et al.’s (2002) study, in order to exclude firms that are less
likely to have managed earnings[10]. We define our calculated abnormal accruals
measures to be ex-post measures of earnings management. Next, we identify the
existence of a Big4 auditor[11] and the degree of firm leverage as ex-ante measures of
earnings management, based on the conjecture that improved external monitoring will 11
reduce earnings management. Studies documenting the role of large audit firms in
enhancing earnings quality show that firms audited by larger audit firms have lower
abnormal accruals (Francis et al., 1999). A standard explanation for the positive
relationship between the size of an audit firm and the quality of the auditee’s reported
earnings is that larger audit firms provide higher-quality audits to reduce the risk of
litigation and to protect their brand name reputation (De Franco et al., 2011; DeAngelo,
1981; Becker et al., 1998). Financial leverage may proxy for the extent to which earnings
are managed, given that creditors demand high-quality and conservative financial
information. These creditors could be monitoring the firm and its accrual process and
reducing information asymmetries, resulting in higher quality and conservative
reported earnings (Fama, 1985; Berlin and Loeys, 1988; Yu, 2007). In all, we expect that
earnings management should be less (more) prevalent in firms audited by a (non-) Big4
auditor as well as in more (less) leveraged firms.

3.1 Discretionary accruals measure

The discretionary accruals component of reported earnings is proxied by unexpected
accounting accruals identified by the modified Jones (1991) model. Following
Kothari et al. (2005), we include return on assets (ROA, a proxy for performance) as an
independent variable in the modified Jones model to account for the impact of firm
performance on accruals (Raman and Shahrur, 2008). We add external financing
matches based on recent research suggesting that changes in external financing
activities lead to economic and statistical measurement errors in unexpected accruals
(Shan et al., 2010). We further add to the model the number of years from IPO listing as
a proxy for firm age, another firm characteristic which may have a significant
influence on earnings management activities[12]. Prior research also suggests that
firms with higher growth opportunities tend to have higher accruals (McNichols, 2002;
Cohen et al., 2008). We thus control for growth options in the modified Jones model by
including a book-to-market ratio (Raman and Shahrur, 2008).
For each firm in our sample, we estimate the following model:
   
TACC t 1 DREV t DARt GPPE t
¼ a* þ b1 * 2 þ b2 * þ b3 *ROAt
TAt21 TAt21 TAt21 TAt21 TAt21
ð1Þ
DEXFIN t
þ b4 * þ b5 *AGE t þ b6 *BM t þ 1t
TAt21
where TACC is total accruals, TA is total assets, DREV is the change in revenues from
previous year, DAR is the change in accounts receivable, GPPE is gross fixed assets,
ROA is net income before extraordinary items scaled by lagged total assets, DXFIN is
net external financing measured as the sum of net cash proceeds received from equity
holders (equity issuances less dividends and repurchases) and net cash inflow received
PAR from debt holders (debt issuances less debt repayments), AGE is the number of years
from IPO listing, and BM is the ratio of total assets to total assets minus book value of
24,1 equity plus market value of equity. Consistent with prior research, total accruals are
net income minus cash flows from operations. The regression is estimated using panel
data (same companies in successive years) with industry[13] and year fixed effects.
Thus, we include intercept dummies for industry and year to capture constant
12 industry-specific and year-specific factors. The residual in the regression model (1) is
the measure of unexpected – discretionary – accruals, which indicate the extent to
which a firm manages its earnings (Dechow and Skinner, 2000).
As a robustness check, we also apply an alternative matching approach proposed
by Kothari et al. (2005). Specifically, we match each firm-year observation in our
sample with that observation in a control sample from the same industry and year with
the closest performance, net external financing and firm age. Again, external financing
and age matches are added to the original performance matching approach as
per Kothari et al. We then adjust each firm’s estimated discretionary accruals by
subtracting the corresponding estimated discretionary accruals of a matched firm. The
use of a performance-matched firm approach in our analyses provides inferences
similar to those obtained when using a regression-based approach, where performance,
age and external financing are controlled for by adding their respective measures as
independent variables in the modified Jones model.

3.2 Nonoperating accruals measure

As a second measure of earnings management, we employ Givoly and Hayn’s (2000)
nonoperating accruals measure. Geiger et al. (2005, p. 7) advocate use of a nonoperating
accruals measure in addition to the discretionary accruals measure “to address
empirical concerns regarding the Jones model [. . .]”. Nonoperating accruals are
calculated as net income plus depreciation and amortization minus cash flows from
operations minus operating accruals. Operating accruals are defined as:

DAccounts receivables þ DInventories þ DPrepaid expenses 2 DAccounts payable

2 DTaxes payable:
To control for size effects, we scale nonoperating accruals by beginning-of-year total
assets (consistent with the scaling of the modified Jones model). Given that
nonoperating accruals consist of items which are under the discretion of management
(e.g. loss and bad debt provisions, the effect of changes in estimates, gains or losses on
the sale of assets, asset write-downs, capitalization of expenses), they are used to
indicate whether firms actively engage in earnings management.
In our analyses, we use absolute abnormal accruals rather than signed abnormal
accruals, as we are interested in capturing the extent or intensity of earnings
management (Aboody et al., 2005; Raman and Shahrur, 2008), rather than in the chosen
direction of manipulation[14]. We point out that use of signed rather than absolute
accruals does not alter the inferences from the analyses.
We restrict our sample to firms with positive book value of equity (Collins et al.,
1997; Brown et al., 1999; Core et al., 2003; De Franco et al., 2011). We require enough
data to estimate the variables used in our tests, hence firms with insufficient data are
excluded from the analysis. To reduce the effect of outliers in our tests, we winsorize all
continuous variables at the 1st and 99th percentiles. We winsorize outliers instead
of deleting them to conserve data. The results do not change qualitatively when Female directors
outliers are deleted. After applying all the restrictions discussed above, our sample and earnings
consists of 60 firms between 2002 and 2009, resulting in 478[15] firm-years.
In Table I we present our earnings management measures throughout the sample
period. Our sample period starts in 2002, the year the Sarbanes-Oxley Act (SOX,
July 30, 2002) was passed into law, and thus the requirement for CEO/CFO certification
and attestation of internal control. As shown in Table I, throughout the years 13
2002-2009, our earnings management metrics did not change significantly. Abnormal
accruals (both ex-post measures) throughout the period were in the range of ten-15 (four
to seven) percent of total assets on average (median). As for our ex-ante measures of
earnings quality, throughout the entire period, in 87-92 percent of firm-years the
auditor was Big4[16]. Leverage ranged from 22 to 25 (seven to ten) percent of total
assets on average (median). We point out that in 2001, prior to the introduction of SOX,
the levels of abnormal accruals were about 10-15 percent higher (untabulated),
implying that SOX had an immediate impact on our sample firms expressed in a
significant reduction in earnings management; however, in the years that followed, the
extent of earnings management seems to have remained on a fairly similar level. This
finding notwithstanding, in each of our multivariate regression analyses we include
intercept dummies for each year to capture constant year-specific factors.

4. Tests and results

4.1 Univariate analyses of the relation between female directors and earnings
management
Table II contains descriptive statistics for our sample firms. The sample firms’ BODs
are composed of ten independent directors, on median. On these boards, the median
proportion (number) of women is about 14 percent (1). The median proportion (number)

2002 2003 2004 2005 2006 2007 2008 2009

Abs. discretionary accruals

Mean 0.121 0.110 0.114 0.108 0.110 0.096 0.133 0.142
Median 0.075 0.049 0.069 0.054 0.074 0.054 0.069 0.066
Abs. nonoperating accruals
Mean 0.120 0.117 0.146 0.116 0.099 0.104 0.150 0.134
Median 0.052 0.038 0.051 0.071 0.055 0.045 0.067 0.056
Big4 auditor
Mean 0.87 0.91 0.91 0.92 0.90 0.91 0.91 0.87
Leverage
Mean 0.240 0.219 0.235 0.219 0.234 0.215 0.252 0.252
Median 0.094 0.069 0.088 0.069 0.100 0.099 0.103 0.104
No. of observations 60 60 60 60 60 60 60 58
Notes: This table reports the mean and median of our earnings management metrics, by year;
absolute discretionary accruals are from the modified Jones (1991) model, performance-matched as per
Kothari et al. (2005); absolute nonoperating accruals are as described by Givoly and Hayn (2000); both
measures are taken as a percentage of previous year-end total assets; Big4 auditor is an indicator
variable that equals 1 if the auditor is a Big4 audit firm and 0 otherwise; leverage is the ratio of total Table I.
liabilities less current liabilities to total assets; extreme values (top and bottom 1 percent) of continuous Measures of earnings
variables are winsorized management by year
PAR
Mean Median SD Minimum Maximum
24,1
No. of independent directors on BOD 10.210 10.000 3.037 7 15
No. of female directors on BOD 0.930 1 0.628 0 5
Percentage of female directors on BOD 0.148 0.143 0.124 0.000 0.500
No. of female directors on audit committee 0.640 1 0.581 0 3
14 Percentage of female directors on audit
committee 0.192 0.250 0.180 0.000 0.750
Percentage of director holdings 0.165 0.108 0.194 0.000 0.770
Percentage of insider holdings 0.414 0.423 0.263 0.000 0.970
Percentage of institutional holdings 0.186 0.112 0.235 0.000 0.880
Female director holding 0.330 0.000 0.471 0.000 1.000
Female CEO/CFO 0.246 0.000 0.421 0.000 1.000
CEO/Chairperson duality 0.440 0.000 0.496 0.000 1.000
No. of directors with financial literacy 3.720 3 2.099 1 9
Big4 auditor 0.905 1.000 0.262 0.000 1.000
Sales growth 0.226 0.098 0.852 2 0.870 5.770
Firm size 554 112 1,351 1.8 9,632
MV 3,212 125 12,984 1.3 69,381
Leverage 0.232 0.103 0.287 0.000 0.890
ROA 20.065 0.001 0.247 2 0.960 0.450
ROE 20.178 0.017 0.843 2 4.760 0.970
R&D intensity 0.791 0.671 0.380 0.501 1.910
Profit margin 20.368 0.024 1.201 2 4.730 0.820
Abs. discretionary accruals 0.117 0.062 0.148 0.000 0.837
Abs. nonoperating accruals 0.122 0.056 0.187 0.000 1.140
Notes: This table reports descriptive statistics for our sample of 60 Israeli firms listed in the USA
from 2002 to 2009 (478 firm-year observations); number of independent directors on BOD measures the
size of BOD; number of (percentage) female directors on BOD is the number (percentage) of female
directors on our sample firms’ BODs; number of (percentage) female directors on audit committee is
the number (percentage) of female members on our sample firms’ audit committees; percentage of
director (insider, institutional) holdings is the proportion of shares held by the firm directors (insiders,
institutional investors); female director holding is an indicator variable that equals 1 if at least one
female director holds the company’s shares and 0 otherwise; female CEO/CFO is an indicator variable
that equals 1 if one of these top two positions in the organization is held by a woman, 0 otherwise;
CEO/Chairperson duality is an indicator variable that equals 1 in case of a CEO/Chairperson duality
and 0 otherwise; Big4 auditor is an indicator variable that equals 1 if the auditor is a Big4 audit firm
and 0 otherwise; sales growth is the percentage change in annual sales; firm size is the firm’s total
assets in $ million; MV is the market value of equity in $ million; leverage is the ratio of total liabilities
less current liabilities to total assets; ROA is the firm’s operating profit scaled by its net operating
assets; ROE is net income before extraordinary items divided by book value of equity; R&D intensity
is the firm’s research and development expense divided by sales; profit margin is profit margin
calculated as operating profit divided by sales; absolute discretionary accruals are from the modified
Jones (1991) model, performance-matched as per Kothari et al. (2005); absolute nonoperating accruals
Table II. are as described by Givoly and Hayn (2000); both measures are taken as a percentage of previous year-
Descriptive statistics end total assets; extreme values (top and bottom 1 percent) of continuous variables are winsorized

of women on the firms’ audit committees is 25 percent (1). We point out that with the
introduction of SOX and throughout the sample period the proportion of women on
BODs as well as their proportion on the audit committee has not changed significantly.
Additional corporate governance factors indicate that our sample firms have a
relatively concentrated ownership structure, with insiders holding about 42 percent
of the firms’ shares. In 44 percent of the firm-years there is a CEO/Chairperson duality. Female directors
We also find that independent directors hold 10.8 percent of the firms’ shares, and that and earnings
in 33 percent of our sample firm-years at least one female director holds shares in the
firm. The median proportion of the firms’ shares held by institutional investors is
11.2 percent. In 25 percent of our sample firm-years, either the CEO or the CFO was a
woman. Female CEO/CFOs are further analyzed in Section 4.2.
Table II also presents descriptive statistics for various financial data for the sample 15
firms. The median firm’s total assets are $112 million, and the median market value of
the firm’s equity is $125 million. The rate of annual sales growth is about 10 percent.
Firms’ leverage is 10.3 percent of total assets. GAAP-based profitability measures
(ROA, ROE and operating profit margin) are, as expected for high-technology firms,
low (0.1, 1.7 and 2.4 percent, respectively). On the other hand, annual economic profits
based on the change in the market price of the firm’s shares are around 53 percent
(untabulated). The low accounting profits are attributed primarily to the immediate
expensing of R&D under GAAP (Callen et al., 2010). R&D intensity (the firm’s research
and development expense divided by sales) for our sample firms is 67.1 percent.
We now examine whether and how the extent of earnings management is affected by
the presence of female directors, as measured by the proportion of women on the firms’
BODs. Specifically, we compare the mean and the median of our earnings management
metrics in firms with a proportion of women on the BOD higher than the sample firms’
median of 14 percent, versus firms with a proportion lower than 14 percent[17].
The results, displayed in Table III, indicate that both measures of abnormal accruals are
significantly lower when the proportion of female directors on the BOD is higher[18].
Similarly, we examine how the presence of women on the firm’s audit committee affects
the extent to which earnings are managed. Again we differentiate between audit
committees where the proportion of women is higher than the median in our sample –
25 percent – and those with a proportion of less than 25 percent (the median audit
committee size is three members). The effect of the presence of women on the audit
committee is similar to that found on the BOD as shown in Table III. Hence, our ex-post
measures of earnings management imply that earnings are managed to a lower extent
when there are more women on the BOD and when there are more women on the audit
committee. We point out that the correlation between the proportion of women on the
BOD and their proportion on the audit committee (untabulated) is around 0.5 (according
to Pearson’s as well as Spearman’s r, p ¼ 0.000).
The ex-ante proxies for earnings management – audit firm size and leverage –
provide interesting results. While both groups of firms are generally audited by a Big4
auditor, the proportion of firm-year observations with “high” (“low”) female
representation audited by a Big4 auditor is significantly lower (higher). Given that the
majority of our sample firms are audited by a Big4 auditor, we need our second ex-ante
measure to corroborate the inference from our Big4 auditor variable. Indeed, we find that
firms with more women on their boards are significantly less leveraged, possibly
because women are more risk averse. Thus, both ex-ante measures point towards a lower
degree of external monitoring in firms with a high degree of female representation which,
according to the literature, could lead to lower earnings quality. Nonetheless, earnings
quality seems to be higher in these firms as per the ex-post measures of earnings
management. A possible interpretation of this conundrum is that the presence of women
on the BOD and on the audit committee serves as internal monitoring.
PAR
Percentage of female directors on Percentage of female members on
24,1 BOD audit committee
.14% # 14% Difference . 25% # 25% Difference

Abs. discretionary accruals

Mean 0.096 0.138 2 0.042 (0.020) 0.096 0.138 20.042 (0.020)
16 Median 0.049 0.075 2 0.026 (0.058) 0.044 0.068 20.024 (0.034)
Abs. nonoperating accruals
Mean 0.105 0.139 2 0.034 (0.048) 0.105 0.139 20.034 (0.055)
Median 0.041 0.071 2 0.030 (0.006) 0.045 0.067 20.022 (0.036)
Big4 auditor
Mean 0.84 0.97 2 0.13 (0.000) 0.86 0.95 20.09 (0.050)
Median 1 1 0 1 1 0
Leverage
Mean 0.155 0.309 2 0.154 (0.001) 0.176 0.288 20.112 (0.010)
Median 0.050 0.157 2 0.107 (0.001) 0.061 0.136 20.075 (0.055)
No. of observations 239 239 239 239
Notes: p-values are in parentheses (two-tailed); this table presents the mean and median of our
earnings management metrics as well as the difference between the means and the medians for firms
with a proportion of women on the BOD (audit committee) higher than the sample median of 14 percent
(25 percent) versus firms with a proportion lower than 14 percent (25 percent); absolute nonoperating
Table III. accruals are as described by Givoly and Hayn (2000); absolute discretionary accruals are from the
Univariate analysis of the modified Jones (1991) model, performance-matched as per Kothari et al. (2005); both measures are
relation between earnings taken as a percentage of previous year-end total assets; Big4 auditor is an indicator variable that
management and the equals 1 if the auditor is a Big4 audit firm and 0 otherwise; leverage is the ratio of total liabilities less
proportion of female current liabilities to total assets; the differences in the means and the medians are tested using a t-test
directors and a Mann-Whitney test, respectively

Notably, this interpretation supports the inference that the representation of women on
the firms’ boards is related to an enhanced quality of book earnings.
We further estimate Pearson’s as well as Spearman’s correlations between our
measures of earnings management and the proportion of female directors on the BOD,
as well as on the audit committee. The results (untabulated) show that both accrual
measures are significantly negatively correlated with the proportion of women on the
BOD (about 2 0.15), as well as with the proportion of women on the audit committee
(about 2 0.13). Moreover, consistent with the findings above, a negative correlation
exists between the proportion of women on the boards and the size of the audit firm
(about 2 0.18) as well as the degree of financial leverage (about 2 0.11). All correlations
are significant at the 5 percent level. The results thus far indicate that, even if external
monitoring by auditors and creditors is weaker, in firms with a high presence of
women in corporate governance, the extent of earnings management is lower.

4.2 Does the gender of CEO/CFO matter?

In this subsection, we focus on the highest-ranked management positions accountable
for the quality of reported earnings and thus to the actual management of earnings –
CEO and CFO[19]. Specifically, we explore how earnings management is affected by
the CEO and/or CFO being female rather than male. Neither of our sample firms had
both a female CEO and a female CFO at the same time. In all, in 15 (103) firm-year
observations, the CEO (CFO) was a woman.
 In Table IV we compare the extent of earnings management in firms with a female Female directors
CEO or CFO to that in firms with a male CEO as well as CFO. Using the discretionary and earnings
accrual measure, the results indicate that earnings management is significantly lower
when either the CEO or the CFO is a woman. The difference in nonoperating accruals
between firms with a female CEO/CFO and firms with a male CEO as well as CFO is
also negative, however, insignificant. Prior studies provide evidence for a significant
effect of CFO gender on earnings management (Peni and Vahamma, 2010; Wei and Xie, 17
2009; Jiang et al., 2010), but no effect of the gender of CEO. Finally, the occurrence of a
Big4 audit firm in companies with a female CEO/CFO is significantly lower (80 percent
compared with 94 percent). Moreover, with women in these top positions, the extent of
financial risk taken, as proxied by financial leverage, is also significantly lower
(a difference of 8.8 percent (4.5 percent) of total assets on average (median), p ¼ 0.001
(0.028)). Thus, the inferences from the analysis of the directors’ gender apply to the
gender of the top executive managers as well. The results point towards women being
accountable for less earnings management when bearing either direct or indirect
liability for misrepresentations in financial statements.
The proportion of female directors on the BOD is not significantly different between
firms with a female CEO/CFO and firms with male CEO/CFO. In contrast, we find that
the average proportion of women on the audit committee is significantly higher (lower)
in firms with a female (male) CEO/CFO (around 22 percent (18 percent), p ¼ 0.061).
Notwithstanding this finding, the effect of a female CEO/CFO on the extent of earnings
management remains significant after controlling for the proportion of women on the
audit committee. This incremental effect of the presence of women in top management
(audit committee) over and above the effect of the presence of women on the audit

Female CEO/CFO Male CEO/CFO Difference

No. of observations 118 360

Abs. discretionary accruals
Mean 0.090 0.126 2 0.036 (0.028)
Median 0.043 0.069 2 0.026 (0.030)
Abs. nonoperating accruals
Mean 0.117 0.124 2 0.007 (0.264)
Median 0.055 0.056 2 0.001 (0.101)
Big4 auditor
Mean 0.80 0.94 2 0.14 (0.006)
Median 1 1 0
Leverage
Mean 0.166 0.254 2 0.088 (0.001)
Median 0.069 0.114 2 0.045 (0.028)
Notes: p-values for the difference between the means and the medians are in parentheses (two-tailed);
this table presents the mean and median of our earnings management metrics, as well as the difference
between the means and the medians, for firms with a female CEO or CFO versus firms with a male
CEO as well as CFO; absolute nonoperating accruals are as described by Givoly and Hayn (2000); Table IV.
absolute discretionary accruals are from the modified Jones (1991) model, performance-matched as per Univariate analysis of the
Kothari et al. (2005); both measures are taken as a percentage of previous year-end total assets; Big4 relation between earnings
auditor is an indicator variable that equals 1 if the auditor is a Big4 audit firm and 0 otherwise; management and
leverage is the ratio of total liabilities less current liabilities to total assets CEO/CFO gender
PAR committee (top management) is demonstrated in the following multivariate analysis,
24,1 among other things.

4.3 Multivariate analysis of the relation between female directors and earnings
management
We move from a univariate to a multivariate analysis of the relation between directors’
18 gender and earnings management. The multivariate approach allows us to control for
other determinants of abnormal accruals and obtain an estimate for the direct effect of
the presence of female directors on earnings management. We thus estimate the
following regression model:

AbAcc ¼ a0 þ a1 Big4Auditor þ a2 Leverage þ a3 Size þ a4 SalesGr

þ a5 BoardSize þ a6 %FemBOD þ a7 AuditCom þ a8 %FemAudCom
ð2Þ
þ a9 %DirHold þ a10 FemDirHold þ a11 %InsHold þ a12 %InstHold
þ a13 NoDirFin þ a14 CEO=ChairDual þ a15 FemCEO=CFO
þ a16 CEOAge þ a17 CEOTenure þ a18 CEOFounder þ 1

where AbAcc is absolute abnormal accruals measured either as performance-matched

discretionary accruals or as nonoperating accruals. Big4Auditor equals 1 if the company
is audited by a Big4 audit firm and zero otherwise. Leverage is the ratio of total liabilities
less current liabilities to total assets. Size is the log of total assets. SalesGr is the
percentage change in annual sales. Big4Auditor and Leverage control for accrual
quality. We predict that abnormal accruals decrease in Big4Auditor and Leverage.
When abnormal accruals are measured by nonoperating accruals, which are not
ROA-matched, we add ROA as another explanatory variable to proxy for profitability.
Sales growth and ROA are expected to be positively related to the extent of earnings
management. We have no prediction for the coefficient on size.
Based on previous corporate governance literature, we supplement our multivariate
analysis with variables that control for board characteristics and corporate governance
mechanisms, which have been shown to have a potential impact (the results from the
literature are inconclusive) on earnings management. For example, Garcia-Meca and
Sanchez-Ballesta (2009) show that board independence, board size and audit committee
independence can improve investor confidence by constraining earnings management.
While some studies suggest that larger boards are less effective in monitoring accruals
due to coordination problems (Yemark, 1996), others suggest that large boards are
associated with low levels of accrual management (Xie et al., 2003; Ghosh et al., 2010[20]).
Furthermore, while some studies show that firms with larger boards have lower firm
value as well as lower performance (Yemark, 1996; Eisenberg et al., 1998), others show
that board size is positively associated with firm performance (Dalton et al., 1999).
Xie et al. (2003) show that the composition of the BOD and of the audit committee is
related to the likelihood that a firm will engage in earnings management, and that BOD
and audit committee members with financial backgrounds are associated with smaller
discretionary accruals. Osma and Noguer (2007) find that independent directors do not
play a main role in constraining earnings manipulation as suggested by prior studies,
but that institutional directors do. Furthermore, they show that the existence of an
independent audit committee does not affect earnings management.
 The variables that we add to our regressions are as follows. BoardSize is total Female directors
number of independent directors on BOD; %FemBOD is the percentage of women on and earnings
the BOD; AuditCom is the number of members on the firm’s audit committee;
%FemAudCom is the percentage of women on the audit committee; %DirHold is the
percentage of director holdings in the company’s shares; FemDirHold is a dummy
variable equal to 1 if at least one female director holds the company’s shares; %InsHold
is the percentage of insider holdings in the company; %InstHold is the percentage of 19
institutional holdings in the company; NoDirFin is the number of directors with
financial literacy[21]; CEO/ChairDual is a dummy variable equal to 1 in case of a
CEO/Chairperson duality; FemCEO/CFO is a dummy variable equal to 1 if one of these
top two positions in the organization is held by a woman. A director with financial
literacy is one whose education or background includes at least one of the following
degrees: MBA, Master of Accounting and/or Finance, CPA, current or past position as
an executive in a financial institution (Xie et al., 2003; Schrand and Zechman, 2011). In
our sample, the number of directors with financial literacy is on average (median)
3.72 (3) (Table II). Board independence implies that the majority of the members of a
company’s board must be independent, that is, they are not associated with the
company except for sitting on its BOD. Specifically, independent directors have no
relations with the management of the firm and must not be affiliated with the
firm in any extent (e.g. through insurance companies, accounting, legal or other type of
consulting, investment bank. See for example, Hermalin and Weisbach, 1988;
Shivdasani, 1993; Huang et al., 2008)[22]. In our sample, on all of the companies’ boards,
the requirement for board independence is met.
Based on Schrand and Zechman (2011) who document a positive relation between
CEO overconfidence and the propensity to commit a financial reporting fraud, we also
add to the regressions proxies for overconfidence: CEOAge, CEOTenure measured by
the number of years from the CEO start date at the firm, and CEOFounder which is an
indicator variable that equals 1 if the CEO is a founder, co-founder or part of the
founding family[23]. Finally, to capture industry and year fixed effects, we include
intercept dummies for each industry and year.
Table V presents the results of estimating equation (2) for both accrual measures of
earnings management. The coefficient on the Big4 auditor indicator is significantly
negative as expected, implying that the presence of a Big4 auditor is associated with
lower manipulation of earnings by management. For our second control for accrual
quality – Leverage – we find a significantly negative relation with abnormal accruals,
implying that creditors also constrain accrual manipulation. The coefficient on Size is
(in)significantly negative using discretionary (nonoperating) accruals measure, and the
coefficients on sales growth and ROA are, as expected, significantly positive as per
both accrual measures of earnings management.
The coefficients on the variables that control for board characteristics and corporate
governance mechanisms are all with the expected sign. A significant negative impact on
earnings management is found for the proportion of women on the board, the size of the
audit committee, the proportion of women on the audit committee, the number of
directors with financial literacy, the percentage of director holdings and the percentage
of institutional holdings in the company. Additionally, earnings management is lower in
firms with a female CEO/CFO and in firms where at least one female director is
also a shareholder. In contrast, earnings management increases in concentration
PAR
Abnormal accruals measured by
24,1 Discretionary accruals Nonoperating accruals

Intercept 0.024 (0.709) 2 0.139 (0.081)

Big4Auditor 20.061 (0.016) 2 0.069 (0.017)
20 Leverage 20.658 (0.023) 2 0.443 (0.101)
Size 20.031 (0.000) 2 0.007 (0.303)
SalesGr 0.104 (0.055) 0.102 (0.085)
ROA 0.236 (0.000)
BoardSize 20.001 (0.762) 2 0.004 (0.409)
%FemBOD 20.417 (0.021) 2 0.451 (0.049)
AuditCom 20.031 (0.006) 2 0.051 (0.000)
%FemAudCom 20.452 (0.001) 2 0.443 (0.005)
%DirHold 20.125 (0.001) 2 0.050 (0.278)
FemDirHold 20.040 (0.005) 2 0.029 (0.083)
%InsHold 0.068 (0.013) 0.094 (0.004)
%InstHold 20.146 (0.092) 2 0.165 (0.078)
NoDirFin 20.102 (0.099) 2 0.107 (0.065)
CEO/ChairDual 0.042 (0.008) 0.032 (0.075)
FemCEO/CFO 20.041 (0.064) 2 0.037 (0.044)
CEOAge 0.020 (0.010) 0.010 (0.017)
CEOTenure 20.001 (0.228) 0.001 (0.335)
CEOFounder 20.007 (0.704) 2 0.052 (0.014)
Adj. R 2 0.276 0.236
F-value 6.962 (0.000) 6.433 (0.000)
No. of observations 478 478
Notes: p-values of the coefficients are presented in parentheses; this table presents a multivariate
analysis of the relation between female directors and earnings management; the dependent variable
AbAcc is absolute abnormal accruals measured either as performance-matched discretionary accruals
or as nonoperating accruals; Big4Auditor equals one if the company is audited by a Big4 audit firm
and zero otherwise; Leverage is the ratio of total liabilities less current liabilities to total assets; Size is
the log of total assets; SalesGr is the percentage change in annual sales; BoardSize is total number of
board directors; %FemBOD is the percentage of female directors on the board; AuditCom is the
number of members in the firm’s audit committee; %FemAudCom is the percentage of female members
in audit committee; %DirHold is the percentage of director holdings in the company’s shares;
FemDirHold is a dummy variable equal to 1 if at least one female director holds the company’s shares;
%InsHold is the percentage of insider holdings in the company; %InstHold is the percentage of
institutional holdings in the company; NoDirFin is the number of directors with financial literacy;
CEO/ChairDual is a dummy variable equal to 1 in case of a CEO/Chairperson duality; FemCEO/CFO is
a dummy variable equal to 1 if one of these top two positions in the organization is held by a woman;
CEOTenure is the number of years from the CEO start date at the firm and CEOFounder is an
indicator variable that equals 1 if the CEO is a founder, co-founder or part of the founding family; when
abnormal accruals are measured by nonoperating accruals, we add ROA as another explanatory
Table V. variable to proxy for profitability; ROA is the firm’s operating profit scaled by its net operating assets;
Multivariate analysis of to deal with outliers, we winsorize extreme observations for all continuous variables (top and bottom
earnings management 1 percent); the regressions are estimated using panel data (same companies in successive years) with
and the effect of female industry and year fixed effects; namely, we include intercept dummies for each industry and year to
directors capture constant industry-specific and year-specific factors
of ownership, as measured by the percentage of insider holdings (which is over Female directors
40 percent on average and median in our sample, see Table II), as well as of governance, and earnings
proxied by a CEO-chairperson duality. It is possible that the monitoring role of the BOD
is impaired when the chair of the BOD is the very person whose performance needs to be
monitored – the CEO. Finally, measures of CEO overconfidence indicate that earnings
management increases with the age of the CEO, however, when the CEO is the founder of
the firm, earnings management – as measured by nonoperating accruals – is lower. 21
Although a CEO founder may be regarded as overconfident, it is possible that if he is
more committed to quality performance than a non-founder CEO, then this commitment
will be expressed in higher quality earnings.
The Variance Inflation Factor (VIF) measures, as well as the correlations between the
explanatory variables in regression model (2) (untabulated), indicate the absence of
multicollinearity that could challenge the inferences obtained from the regression
specification.
We conclude that the extent of earnings management is affected by the presence of
women in corporate governance and in management. All of our female representation
variables point in the same direction – earnings management is lower with more women
on the BOD, on the audit committee, and in top management as CEOs and CFOs. It seems
that women working with men create an atmosphere of reduced accounting
aggressiveness.

4.4 Discussion
Our findings seem to be consistent with gender literature that indicates that
female directors improve the board’s functioning, efficiency and decision-making. Our
results may also be explained by findings from the gender literature that show that female
managers, in fact, tend to take fewer risks than male managers, as women are given less
room for error than men. The finding that women are more risk averse can be applied to
female directors, and in practice means they will prefer to abstain from the risk in earnings
management, moreso than men. Thus, in case earnings manipulation has been detected
by the board, female directors’ inclination to avoid the potential negative consequences
that may result due to misrepresentation of earnings will be higher than that of their male
counterparts. Those who are willing to take the risk inherent in earnings management are
highly motivated to demonstrate success and be regarded as successful. Our findings
strengthen the claim that differences exist in the achievement motivation between men
and women in management positions. Achievement is a personality trait characterized by
an attempt to succeed in any situation where there are success indicators. In light of the
gender issues presented in the literature review, fear of negative results for presenting
falsified earnings – as well as moral considerations – may explain the findings that show
that women abstain from the risk inherent in earnings management. Our findings are also
supported by studies that found that while women view work as a source of personal
development and self-fulfillment, men are more focused on advancement and
compensation – elements that create incentive for earnings management. Moreover,
our results can be explained by the dictatorial behavior in high-stress situations among
male managers as opposed to conciliatory behavior by female managers, and by the fact
that women complement men in management and bring a healthy balance to business.
Male and female directors do not necessarily differ in their ability to detect earnings
management; the ability to detect accounting irregularities in general is affected more
PAR by the director’s financial background than by his/her gender[24]. However, once an
24,1 accounting manipulation has been detected, it seems that female directors respond
differently than male directors, via their diligence and ethical standing, as well as other
characteristics documented in the gender literature. That is, even though they may not
be the ones who detect the earnings management, female directors seem to have an
effect on the outcome of the board meeting in which accounting irregularities have
22 been detected, putting a heavier weight on the ethical considerations in the board’s
decisions[25].
An alternative interpretation of our findings may suggest that firms employing a
larger number of women in top management and/or governance positions are at the
outset firms with a higher awareness of the need for balance in business; they maintain
higher social, environmental, legal and ethical standings, and care about how they are
perceived by the public. Further, it is possible that such firms recognize the positive
and important contribution female managers and directors have to firm performance
as documented in the literature. In these firms, higher quality earnings may be a direct
result of the higher standards the firm holds as an entity rather than a direct result of
the proportion of women in the firm. That is, the probability that the firm engages in
manipulations in general, and in earnings manipulations in particular, is lower to begin
with. The relation between the social, environmental, legal, ethical, moral standings of
a firm and the presence of women in high positions (e.g. top management and BOD)
together with the quality of earnings need to be further explored in future research.

5. Additional analysis: are analysts and investors in the stock market

influenced by directors’ gender? A valuation multiples approach
In this phase of the study, we seek to interpret our findings of the relation between
directors’ gender and the quality of earnings in terms of the impact on firm value, if such
exists. We frame the analysis in terms of valuation multiples, using either analyst target
price-to-book or market-to-book equity ratio, where the value estimated by analysts and
the market value are subsequent to the release of financial statements. We focus on full
financial disclosure, rather than on earnings announcements, to ensure that analysts and
investors are provided with the essential information required to assess the extent of
earnings management, e.g. by disaggregating accruals into their discretionary and
nondiscretionary components. Balsam et al. (2002) for example, show that both
sophisticated investors and unsophisticated investors are unable to recognize earnings
management around earnings announcement date. Target prices for the firms’ shares
are extracted from analyst valuations, issued in response to the publication of financial
statement[26].
In the analysis, we account for the interaction between gender differences and quality
of financial reporting by including both gender proxies and earnings management
proxies in the regression equations. The multivariate model also includes various
additional variables that capture firm performance, risk and growth, which are expected
to be related to analyst and investor valuations and have been shown in previous studies
(Kothari et al., 2005) to be related to the levels of (abnormal) accruals (i.e. to earnings
management). We added to the model our proxies for female representation in the firm.
No study thus far has entertained the notion that analysts and/or investors may either
discount or attach a premium to a firm’s value due to the inclusion of women on the board
and/or in top management.
 The estimated regression model is: Female directors
and earnings
P
¼ a0 þ a1 Big4Auditor þ a2 Leverage þ a3 Size þ a4 SalesGr þ a5 ROE
B
þ a6 R&D þ a7 PM þ a8 AbAcc þ a9 %FemBOD þ a10 %FemAudCom ð3Þ
FemCEO 23
þ a11 þ 1:
CFO

P/B is either median analyst target price for the firm’s share, or the market price on the
day following financial statement disclosure, scaled by book value of equity per share.
Analyst target prices are restricted to those issued within one month of a firm’s annual
financial statement disclosure. We focus on the one month period after full financial
disclosure, because at this time, analysts have not yet adapted their predictions for the
next year’s earnings (Gavious, 2007). Thus, their recommendations and target prices are
expected to reflect their direct reaction – as opposed to forecast – to the reported
earnings. ROE is net income before extraordinary items divided by book value of equity;
R&D is the firm’s research and development expense divided by sales; PM is profit
margin calculated as operating profit divided by sales. All other explanatory variables
are as defined in regression equation (2). To control for industry and year effects, we
include intercept dummies for each industry and year.
Table VI presents the regressions’ results. As expected, analyst price-to-book ratio
is significantly positively associated with controls for earnings quality (Big4Auditor
and Leverage), performance (measured by PM), growth (proxied by sales growth and
R&D) and Size. ROE is, as expected, positively associated with analyst valuations,
however, the coefficient is statistically insignificant. The coefficient on AbAcc is
significantly positive, indicating that firms with a higher extent of earnings
management receive higher analyst valuations. This result implies that analysts are
misled by managements that manipulate earnings[27]. As for the gender of directors,
the significantly positive coefficients on the proportion of female directors on BODs as
well as on the audit committee imply that analysts attribute positive value implications
to the presence of women on the firms’ boards. The coefficient on FemCEO/CFO is also
positive, though insignificant. Analysts are seemingly affected not only by objective
factors such as firm performance; notably, they do not seem to miss out on a qualitative
factor that potentially affects this performance – the gender of the firm’s directors.
As for market price-to-book ratio, we find it is significantly positively associated with
performance, growth, profitability (as measured by ROE) and Size. Our two ex-ante
controls for earnings quality, Big4Auditor and Leverage, are insignificantly positively
associated with market value. In contrast, the coefficient on AbAcc is significantly positive.
It seems that investors, like analysts or following analysts, are misled by earnings
manipulation. The results do not change qualitatively when we use the market price:
.
on the day of financial statement disclosure;
.
three days thereafter; and
.
ten days following the disclosure.

Finally, like analysts, investors in the market seem to be positively affected by the
presence of female directors[28]. The VIF measure as well the correlation matrix
PAR
Analysts’ valuations Market valuations
24,1 Abnormal accruals Discretionary Nonoperating Discretionary Nonoperating
measured by accruals accruals accruals accruals

Intercept 5.473 (0.010) 6.906 (0.041) 1.349 (0.653) 3.214 (0.307)

Big4 1.806 (0.035) 1.580 (0.063) 0.441 (0.835) 0.260 (0.908)
24 Leverage 3.337 (0.039) 6.252 (0.018) 2 1.106 (0.598) 2 1.766 (0.428)
Size 1.384 (0.000) 1.914 (0.002) 1.175 (0.021) 1.218 (0.072)
Sales Growth 2.435 (0.015) 4.430 (0.005) 2.028 (0.002) 1.932 (0.004)
ROE 0.080 (0.918) 0.772 (0.563) 1.452 (0.000) 1.581 (0.000)
R&D 2.151 (0.027) 2.570 (0.045) 2.797 (0.034) 2.120 (0.081)
PM 2.710 (0.070) 2.235 (0.031) 2.493 (0.069) 2.118 (0.023)
AbAcc 5.361 (0.094) 9.281 (0.041) 3.624 (0.000) 3.522 (0.000)
%FemBOD 3.618 (0.017) 4.093 (0.000) 2.437 (0.024) 2.337 (0.016)
%FemAudCom 1.413 (0.671) 6.217 (0.003) 2.425 (0.052) 1.607 (0.254)
FemCEO/CFO 0.142 (0.915) 2.484 (0.314) 2 0.349 (0.792) 2 0.862 (0.546)
F-value 10.731 (0.000) 9.349 (0.000) 8.578 (0.000) 9.285 (0.000)
Adj. R 2 0.529 0.427 0.245 0.287
No. of observations 478 478 478 478
Notes: p-values of the coefficients are presented in parentheses; this table presents an analysis of the
relationship between analyst and market valuation multiples and proxies for earnings quality,
performance, risk and growth, as well as measures of the presence of female directors; the dependent
variable is either the median analyst’s target price for the firm’s share, issued within one month of a
firm’s annual financial statement disclosure, or the market share price on the day following financial
statement disclosure, scaled by the book value of equity per share; ROE is net income before
Table VI. extraordinary items divided by book value of equity; R&D is the firm’s research and development
Female directors and expense divided by sales; PM is profit margin calculated as operating profit divided by sales; all other
earnings management explanatory variables are as defined in Table V; to control for industry and year effects, we include
effect on analyst and intercept dummies for each industry and year; we winsorize the top and bottom 1 percent of the
market valuations dependent variables as well as of continuous independent variables

(untabulated) for the explanatory variables in equation (3) do not imply that a
multicollinearity issue exists in our model.

6. Summary and conclusion

This study merges accounting and gender theories to explore whether
earnings management by a firm is affected by the gender of its directors. We find
that the presence of women on the BOD as well as on the audit committee is related to a
lower extent of earnings management. Furthermore, we find evidence indicating that
earnings management is lower when either the CEO or the CFO is a woman. Notably, in
firms with a higher female representation in corporate governance and/or in top
management, external monitoring by auditors and creditors seems to be weaker, yet
earnings quality is higher. Additional analysis suggests that firm valuations by
analysts as well as by investors in the market are positively affected by the presence of
female directors. That is, investment decisions do not seem to miss out on this important
qualitative factor, but acknowledge its affect on the firm’s portrayed performance.
Our findings are supported by gender theories on the unique characteristics of
women in business. The distinctive meaning of gender in business is marked in
decision-making and risk-taking. Gender literature reports a higher level of morality
in judgments and behaviors among women than men, as well as a higher level of Female directors
anxiety among women than among men. Women tend to blame themselves for failures, and earnings
whereas men tend to display self-confidence, be certain of their success and explain
failure through lack of desire and motivation. Men expect to perform well, moreso than
women. As men have higher expectations and greater self-confidence, they may take
risks to realize those expectations. The findings of our study imply that these
characteristics apply not only to women in executive management positions, but also 25
to women in governance positions. Application of our findings to other industries that
are subject to different earnings-management incentives, due to regulation or other
industry-specific factors, should be further explored in future research.

Notes
1. The definition of the BOD as per the Israeli Companies Law includes directors appointed by
the firm’s owners, who engage in formalizing and consolidating the firm’s strategy and
supervising the CEO’s operations and performance. The directors do not run the company;
the executive management with the CEO on top does. The directors, inter alia, oversee the
management and monitor their operations. As such, they are supposed to detect and
constrain earnings management, among other things.
2. Spain requires a future female board representation of 40 percent (Srinidhi et al., 2011; Burke
and Vinnicombe, 2008).
3. For example, a BOD with two to three members must include both female and male
director/s. On a board with nine members, at least four male and four female directors are
required. It should be noted that a law passed in Israel in 1993 that stipulates that
“appropriate representation” must be given to both sexes in the composition of the boards of
state-owned companies. Following the enactment of this law, the percentage of women on
the boards of government companies grew from about 7 to 33 percent. The new bill does not
suffice with the definition included in the existing law in Israel with respect to state-owned
companies – “appropriate representation” – but stipulates that publicly traded companies
have a minimum number of women on their boards, based on board size. (www.knesset.gov.
il/privatelaw/data/18/1999.rtf).
4. According to the bill, public companies will be forced to adopt a policy of “adopt and
disclose” and to publish in their financial statements for their investors, the number of
women on the BOD – and not just the names of the members – along with additional
information about the number of women in the company. As such, the Authority for the
Advancement of the Status of Women submitted a database with the CVs of more than
1,500 women in executive positions, to counter the expected opposition to the bill in advance.
5. Independent directors on the BOD and on the audit committee are not involved in conducting
earnings manipulations. Rather, they are expected to detect and deter earnings management
that may have been conducted by executive managers.
6. According to the Israeli law, the CEO can be chairperson of the BOD for a period that does
not exceed three years, and requires the BOD approval. The CEO is present at the board
meetings even if he is not the chairperson.
7. We thank an anonymous referee for this observation.
8. According to Horner (1969), achievement-oriented women tend to avoid success, as
achievement situations provoke more anxiety for women than for men. While men generally
indicate happiness and feelings of satisfaction over achievement, women’s responses are far
more negative, indicating fear of social rejection and concerns about maintaining femininity.
PAR 9. We check and find that, with very few exceptions (which were excluded from the analysis),
all databases match with each other.
24,1
10. The requirement that minimum discretionary accruals and minimum nonoperating accruals
for our sample firms be higher than one percent of total assets leads to 30 firm-years being
excluded from the analysis due to being less likely to manage earnings. The results are
qualitatively similar if these firms are included, though statistically weaker.
26 11. Big4 auditor refers to the largest international accounting firms that existed over our sample
period.
12. We thank an anonymous referee for this observation. When we define firm age as the
number of years from establishment rather than years from IPO, the qualitative results
remain similar.
13. We reran our regressions for each industry. All inferences remain qualitatively similar.
14. Use of signed abnormal accruals captures the direction of earnings management, i.e. whether
the firm managed earnings upwards or downwards. For example, managers of a firm in
financial distress may choose to manage earnings downwards, if they are engaged in
contract negotiations (for example, with lenders; see, DeAngelo et al., 1994). Alternatively
they may choose to manage earnings upwards prior to an attempt to raise capital or to avoid
reporting losses and earnings decreases (Burgstahler and Dichev, 1997). Hence, the direction
of earnings management depends on specific circumstances in a specific time period for the
specific firm.
15. Two of our sample firms were acquired and went public in 2009.
16. For dichotomous variables with frequencies of 1 and 0, the mean value indicates the
percentage of observations that take on the value “1”.
17. We repeat the analyses, categorizing firms based on the median number of women on the
BOD (one woman is the median, see Table II), i.e. comparing firm-years with at least one
woman on the BOD (347 firm-years) and those with none (131 firm-years). The inferences
from the analyses remain similar to those reported in the text and tabulated.
18. To examine whether there is an “independent nature” of female directors that may constrain
earnings management (rather than the gender itself constraining earnings management),
we compare the presence of female directors and that of female executive managers in our
sample firms. In other words, are female directors often independent directors? We find that
the proportion of female executive managers in our sample is 15.4 percent (14.5 percent) on
average (median), compared with 14.8 percent (14.3 percent) female directors on the
companies’ BOD, respectively, (Table II). Hence, we cannot make a conjecture as to whether
there is an independent nature of female directors in our sample, as the presence of women
among executive directors is the same or higher than their presence on the BOD.
19. A CEO is on the board of our sample firms if s/he is a chairperson as well (CEO/Chairperson
duality); otherwise, CEOs and CFOs are not members of BOD, and would formally be invited
to join board meetings as necessary.
20. In addition to board size, Ghosh et al. (2010) find that audit committee size, activity and tenure
are associated with earnings management. In contrast, they find that earnings management
does not vary with board composition and structure, audit committee composition, expertise
and ownership.
21. Similar qualitative results are obtained when using the proportion, rather than the number,
of financially literate directors on the BOD.
22. This is the requirement in Israel as it is in the USA.
23. Another proxy for overconfidence as per Schrand and Zechman (2011) is CEO compensation; Female directors
however, we could not obtain sufficient information on compensation. We recognize this as a
limitation of our model. and earnings
24. As directors with financial literacy and expertise are more likely to be able to detect earnings
management, we inquire about the qualifications of the female directors on the sample firms’
boards. We find that in about 30 percent of our sample firms there was at least one female
director with financial literacy and expertise (between one and two such female directors, on 27
average). Given this relatively low occurrence of female directors with financial literacy, it
seems that our findings with regards to the relation between director gender and earnings
management cannot be explained by a financial background or qualifications of these directors.
25. In Israel, the BOD of a company that is listed on the exchange is required to determine the
minimum number of directors with financial literacy. Hence, no requirement exists that the
BOD will consist of some large number of financially literate directors or a number that is
considered “sufficient” to enable detection of earnings management. Still, the BOD is
required to detect and deter earnings management when reviewing financial statements,
even though most of the BOD members may not have a financial background or literacy.
26. We use target prices issued by US-based analysts, as taken from The Marker database.
27. Prior studies investigating analysts’ ability to detect earnings management provide mixed
results. For example, Burgstahler and Eames (2003) show that analysts anticipate earnings
management to avoid small losses and small earnings decreases, and incorporate the
anticipated earnings management in their earnings forecasts. However, analysts appear to be
unable to anticipate which firms will engage in such earnings management and which firms
will not. Another growing body of literature finds “analysts are unable or unmotivated to
anticipate fully firms’ earnings management in forecasts” (Abarbanell and Lehavy, 2003).
Gavious (2007) shows that analysts react negatively to firms that artificially inflate earnings
and that this negative reaction is followed by an even stronger negative reaction by the market.
28. Measures of CEO overconfidence were not found to be related either to analyst or to market
valuations.

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About the authors

Ilanit Gavious is an Associate Professor of Accounting in the Department of Business
Administration, Guilford Glazer Faculty of Business and Management, Ben-Gurion University.
She is a Certified Public Accountant and has served as a senior accountant with a Big-4
accounting firm (Deloitte & Touche) and at a leading commercial bank in Israel. Ilanit Gavious is
the corresponding author and can be contacted at: [email protected]
Einav Segev is an Assistant Professor of Social Work in the Department of Social Work, Sapir
Academic College. She specializes in gender theories. She is also a practicing social worker,
working with women.
Rami Yosef is an Associate Professor of Actuarial Science at Ben-Gurion University. In
addition to his academic research, since 1997 Dr Yosef has provided expert actuarial opinions to
various public and private entities, such as pension funds and insurance companies.

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