Board gender diversity, financial decisions and free cash flow: empirical evidence from Malaysia

Abstract

Purpose

This study aims to explore the role of board gender diversity in enhancing the allocation of free cash flow (FCF). It examines the direct effect of board gender diversity, as well as its indirect effect, through debt and dividend policies, on the level of FCF.

Design/methodology/approach

This study applies a three-stage least squares regression analysis for a sample of 367 Malaysian listed firms over the period 2011–2019.

Findings

The results show that female directors significantly deter the opportunistic behavior of managers. The authors find that gender diversity – as measured by the percentage of women on the board and the percentage of female independent directors are likely to reduce excess funds. Moreover, the results reveal a significant indirect effect of board gender diversity, through dividend payouts, on the efficient allocation of FCF. The results are consistent with those in prior studies that document the benefits of board gender diversity.

Practical implications

The research findings are beneficial to policymakers, as it allows them to assess the importance of diversity on boards in the monitoring of the managers, particularly as it pertains to the allocation of excess funds. Furthermore, these findings have implications for regulators as they shed light on the importance to undertake measures and reforms to promote board effectiveness by the introduction of gender diversity.

Originality/value

While prior research has examined the effect of board gender diversity on firm performance, the study is the first to investigate both the direct and indirect effect of board gender diversity on the allocation of FCF.