Sri Nidhi 2011

Female Directors and Earnings Quality*
BIN SRINIDHI, City University of Hong Kong
FERDINAND A. GUL, Monash University at Sunway Campus
JUDY TSUI, The Hong Kong Polytechnic University
1. Introduction
In this paper, we examine whether U.S. corporations with gender-diverse boards1 exhibit
higher-quality earnings. We are motivated to study this issue because a rapid voluntary
increase in female directors on corporate boards in the United States over the last 10 years
(Catalyst Group 2004; Rose 2007)2 suggests that female participation in boards is increas-
ingly perceived to be valuable. Moreover, there is a spate of legislative changes in coun-
tries such as Norway that has legislated 40 percent female board representation with
penalties for noncompliance and Spain and Sweden that require future female board repre-
sentation of 40 percent and 25 percent, respectively (Burke and Vinnicombe 2008).3 How-
ever, surprisingly little empirical evidence exists to justify these momentous changes. Only
recently has there been some evidence that female directors provide better oversight over
managers (Adams and Ferreira 2009). That finding suggests that, by better oversight of
managers’ reporting, female participation in boards could improve the quality of earnings.
Our conceptual framework is one in which diversity among the board of directors is
an important part of corporate governance. As a case in point, consider the mix of execu-
tive and independent board directors. On the one hand, the executive directors invest their
nondiversifiable human capital in the firm and therefore have a strong incentive to increase
the value of the firm. However, they also have an incentive to hide or delay the reporting
of bad performance to investors. Unlike executive directors, independent directors do not
invest their human capital in the firm, but have an incentive to sustain their reputation by
ensuring more honest reporting by executives. A board that comprises a mix of executive
and independent directors utilizes this diversity of incentives to benefit investors by both
the value-commitment of executive directors and the disciplining incentive of independent
* Accepted by Peter Clarkson. This paper has benefited from the comments of the Editor, Michel Magnan,
and two anonymous reviewers. We also thank Suresh Radhakrishnan, Ole-Kristian Hope, Sami Hebaitollah,
Bikki Jaggi, Agnes Cheng, Katherine Schipper, Simon Fung, Dan Simunic, Ross Watts and various partici-
pants of workshops at The Hong Kong Polytechnic University, the Indian School of Business and the AAA
2007 conference for their comments. We thank Chung Ki Min for his help in the selection bias control sec-
tion. We appreciate the research assistance of Angel Sung. The financial support for this project from The
Hong Kong Polytechnic University Internal Research Grant is gratefully acknowledged.
1. Women constitute less than 14 percent of board directors and there are virtually no all-female boards.
Therefore, gender diversity on corporate boards is equivalent to female board participation. Accordingly,
we use ‘‘female board participation’’ to signify both the presence of one or more female directors on the
board and gender composition, measured by the percentage of female directors on the board.
2. The trend in increasing female participation on corporate boards has also been helped by the disclosure
rules adopted in 2003 by the Securities and Exchange Commission (SEC) concerning director nomination
(SEC 2003; Cohn 2006).
3. Bill S-238, a bill to bring about gender parity in Canadian corporate boards, was introduced in the Cana-
dian parliament on June 4, 2009 by Senator Hon. Hervieux-Payette based on a law on parity in force in
Quebec.
Contemporary Accounting Research Vol. 28 No. 5 (Winter 2011) pp. 1610–1644 CAAA
doi:10.1111/j.1911-3846.2011.01071.x
Female Directors and Earnings Quality 1611
directors. Experts in finance, in law, and in the firm’s products and services bring value
through diverse expertise; international directors bring value through diverse cultural expe-
riences; and directors who are exposed to other boards add value by bringing diverse per-
spectives to board discussions. Effectively, each type of diversity broadens the scope of
action and brings more perspectives to the board’s attention. In a similar vein, female
directors who are exposed to different experiences than men4 (Hillman, Shropshire, and
Cannella 2007) could enrich the discussions and improve the decisions made by the board.
Research in organizational theory reveals that gender-diverse boards have more
informed deliberations and discuss tougher issues that are often considered unpalatable by
all-male boards (Clarke 2005; Huse and Solberg 2006; Stephenson 2004; McInerney-
Lacombe, Billimoria, and Salipante 2008). Female participation also promotes more effective
board communication (Joy 2008) to investors. Together, more informed board discussions
and better communication improve the board’s monitoring ability (Terjesen, Sealy, and
Singh 2009; Groom 2009). Recent literature in finance (Adams and Ferreira 2009) shows that
female directors exhibit greater diligence in monitoring and assume positions on committees
charged with transparent reporting and earnings quality, such as auditing and corporate
governance committees. In a recent working paper, Adams, Gray, and Nowland (2010) argue
that female directors exhibit more independent thinking and improve the monitoring process.
They further show that investors value the addition of female directors to the board. Jointly,
better monitoring and lower information asymmetry facilitate better earnings quality.
In our tests we use two measures of earnings quality. Our first measure is discretion-
ary accruals quality (McNichols 2002; Francis, LaFond, Olsson, and Schipper 2005),
computed as the absolute value of the estimation error in accruals after controlling for
current, past, and future cash flows, sales and long-term assets, and operating cycle and
volatility in sales. Our use of this measure is based on the argument in Francis et al.
2005 that discretionary accruals quality is (i) attributable to managers’ estimates and
accounting implementation decisions (in contrast to innate factors that are slow to change
and attributable to the business model) and (ii) priced by investors’ more than abnormal
accruals and other proxies for accruals quality. Our second measure of earnings quality is
the lower propensity among firms whose unmanaged earnings are just shy of earnings
benchmarks to manage earnings and beat the benchmarks by a small amount.5 Small
increases (over the prior year’s earnings) and surprises (over the analyst forecasts) consti-
tute earnings components that are not likely to be related to firm performance.6 We
also conduct additional tests in which earnings quality is measured by lower perfor-
mance-adjusted discretionary current accruals (Kothari, Leone, and Wasley 2005). After
controlling for self-selection and other confounding factors, including audit committee
characteristics and an index of board governance, we find that firms with female directors
exhibit higher earnings quality.
4. The difference in experience between men and women has been attributed to different socialization pro-
cesses (Ambrose and Schminke 1999). Because of this, we expect female and male directors to respond dif-
ferently to similar incentives.
5. When a firm’s unmanaged earnings are marginally lower than earnings benchmarks such as prior-year
earnings or analyst-forecasted earnings, managers have an incentive to manipulate earnings to meet ⁄ beat
those benchmarks (Burgstahler and Dichev 1997; Burgstahler and Eames 2003).
6. There is evidence that in a general sample beating earnings benchmarks constitutes good news and is asso-
ciated with better firm performance in future (Bartov, Givoly, and Hayn 2002; Jennings 1987). This is rea-
sonable because better earnings, in general, should signal better future performance. However, if the firm’s
premanaged income falls just shy of the benchmark, managers have a strong incentive to beat the bench-
mark minimally by managing earnings. A sample where the benchmark is beaten by a small amount,
therefore, is more likely to be characterized by earnings management rather than a true increase in earn-
ings that signals better performance.
CAR Vol. 28 No. 5 (Winter 2011)

1612 Contemporary Accounting Research
Our results contribute to the board governance literature by showing that firms with
female directors, specifically in the audit committee, exhibit better reporting discipline by
managers. Our results also suggest that studies that link board governance to firm perfor-
mance (see Brown and Caylor 2004) and earnings quality (see Xie, Davidson, and DaDalt
2003) could benefit by explicitly considering female board participation. Further, our find-
ings contribute to the earnings quality literature by showing that gender-diverse boards
and audit committees are associated with higher earnings quality. In conjunction with
other studies that show that female participation improves board attendance and chief
executive officer (CEO) accountability (Adams and Ferreira 2009), increases the audit
effort (Gul, Srinidhi, and Tsui 2008), increases disclosure (Gul, Srinidhi, and Ng 2010),
and decreases cost of capital (Gul, Min, and Srinidhi 2010), our results imply that includ-
ing female directors on the board and the audit committee are plausible ways of improving
the firm’s reporting discipline and increasing investor confidence in financial statements.
Our results support the view espoused by Thomas and Ely 1996 that female participation
on the board is synergistic in that the overall board oversight improves more than if male
members with similar complementary abilities were included in the board.7
The remainder of the paper is organized as follows. The next section reviews the rele-
vant literature and states the hypothesis. The third section presents the research design,
and the fourth section provides the empirical analyses and results. The last section gives
the concluding remarks.
2. Background and hypothesis

Board effectiveness, female participation and earnings quality
Structuring the board of directors8 is a corporate governance mechanism9 that influences
the decisions made by managers when there is separation of ownership from control.
Board structuring includes, among other things, determining the mix of independent and
executive directors, designating audit, compensation, nominating, corporate governance
and other committees of the board, determining the mix of directors with different depth
and breadth of expertise, experience and exposure, and determining the extent of female
representation on the board.
Board governance influences the managers’ operating, investing and reporting deci-
sions. Independent boards and audit committees constrain opportunistic actions by man-
agers and thereby improve both firm performance and the quality of reporting (Morck,
Shleifer, and Vishny 1988; Byrd and Hickman 1992; Brickley, Coles, and Terry 1994; Yer-
mack 1996; Core, Holthausen, and Larcker 1999; Klein 2002a, 2002b; Gompers, Ishii, and
Metrick 2003; Carcello, Hollingsworth, Klein, and Neal 2006; Larcker, Richardson, and
Tuna 2007). Particularly, effective monitoring by the board and the audit committee
improve the accuracy of accrual estimates made by managers. Prior research shows that
7. Thomas and Ely (1996) propose three paradigms of which the third is consistent with our view. In this
paradigm, differences between male and female directors are effectively incorporated into the governance
decisions of the board. In effect, this paradigm suggests that women not only bring different abilities to
the board but also enable a synergistic improvement in its overall functioning. In other words, gender-spe-
cific characteristics of female directors are assimilated by male board members in their decision making.
Overall, this improves the performance of the board to a greater extent than can be attributed to the com-
plementary abilities that women bring to it. That is, the improvement in board performance that is
achieved after the inclusion of women directors is sustained because the whole board becomes more sensi-
tive to issues of earnings quality. See Thomas and Ely 1996 for a discussion of the three paradigms.
8. By structuring, we refer to the characteristics of the board that can be measured by external observers
without recourse to detailed assessment of governance practices within the organization (Larcker et al.
2007).
9. Other mechanisms include the market for corporate control and ownership structuring.

boards with more independent directors10 exhibit higher earnings quality (Dechow, Sloan,
and Sweeney 1996; Ball, Kothari, and Robin 2000; Tsui, Jaggi, and Gul 2001; Klein
2002a; Xie et al. 2003; Gul and Leung 2004; Peasnell, Pope, and Young 2005; Agrawal
and Chadha 2005; Ashbaugh, Collins, and LaFond 2006). Furthermore, when unmanaged
earnings are just below benchmarks such as the earnings forecasted by analysts or
prior year earnings, the managers have incentive to distort accruals to meet or beat those
benchmarks. However, an effective board curbs this tendency to distort the reported
earnings.
Audit committees improve earnings quality by exercising oversight on the selection of
the auditor, demanding high audit quality, reviewing the adequacy of internal controls,
monitoring the internal audit function, and reviewing accounting disclosure and policy
choices. Prior literature shows that independent audit committee members influence the
selection of the external auditor and demand higher-quality financial statements (Carcello,
Hermanson, Neal, and Riley 2002; Bliss, Gul, Majid, and Sun 2008). Carcello et al. (2002)
show that director independence, expertise, and frequency of interaction lead to higher
audit effort, which in turn is associated with higher earnings quality (Srinidhi and Gul
2007). The above-mentioned studies show that earnings quality can be improved by board
structuring.
In this paper we add to our understanding of the effects of board structures by show-
ing that firms that have boards comprising both male and female directors exhibit higher
earnings quality. A review of the literature reveals that boards with female directors exhi-
bit greater board diligence and demand greater accountability for managers’ performance
(Adams and Ferreira 2009). Adams et al. (2010) argue that because they do not belong to
old-boy networks, female directors are more likely to exhibit independent thinking, which
is crucial for effective oversight. Carter, Simkins, and Simpson (2003, 37) show that female
directors are more likely to exhibit greater independence and activism than their male
counterparts. These studies suggest that including female directors could improve board
oversight and independence and thereby improve earnings quality.
Further, compared to all-male boards, women bring different viewpoints to the board-
room and facilitate more informed decisions (Daily, Certo, and Dalton 2000; Rose 2007),
thus increasing transparency (reducing information asymmetry) at the board level. Prior
studies also show that female directors differ in their decision-making styles (Bilimoria
2000; Peterson and Philpot 2007), which implies that they present a different perspective
and demand different information compared to men.11 They can improve the depth and
breadth of board discussions by challenging traditional practices and policies. In effect,
gender-diverse boards are better able to secure advice, legitimacy, effective communication,
commitment, and resources for their firms (Hillman et al. 2007) than all-male boards.
These studies suggest that boards with female directors might improve earnings quality by
expanding the scope of board discussions.
A third mechanism by which female directors might improve earnings quality is by
reducing the extent of opportunistic earnings management. Studies on the attributes of
women suggest that they might be less tolerant than men towards opportunistic behavior.
10. Prior studies in accounting have examined governance and auditing features in addition to board structure
and composition (e.g., Kim and Yi 2006; Kim, Chung, and Firth 2003; Francis, Huang, Rajgopal, and
Zang 2008).
11. One stream of reasoning (Ambrose and Schminke 1999) attributes these differences to ‘‘learned experi-
ences’’ during childhood and adult life outside the workplace that people bring to the workplace. For
example, society has greater expectations of women than men about caring for others, resulting in a differ-
ent socialization experience for women (Gilligan 1977, 1982). An alternative theory, known as the occupa-
tional socialization or beta approach, focuses more on the experiences that men and women encounter in
their occupational roles rather than on gender roles going back to childhood.

Prior literature has shown that women exhibit lower tolerance to opportunism in their
decision making (Ambrose and Schminke 1999; Schminke and Ambrose 1997; Robinson,
Lewicki, and Donahue 2000; Thorne, Massey, and Magnan 2003; Bernardi and Arnold
1997, Krishnan and Parsons 2008), and place less emphasis on expediency, self-interest,
and common practice (Arlow 1991). In a public accounting context, Thorne et al. (2003)
find that women assess the appropriateness of an action independently of the context in
which the action takes place, and Kohlberg (1981) argues that such an approach repre-
sents a higher level of moral maturity than the teleological or purpose-driven approach.
Together, the findings of Thorne et al. 2003 and Kohlberg 1981 suggest that women audi-
tors are less tolerant of opportunistic behavior than male auditors.12
Finally, prior studies indicate that women employ a more trust-building leadership
style than men (Jelinek and Adler 1988; Cohen, Pant, and Sharp 1998; Klenke 2003; Trini-
dad and Normore 2005). Trust-building requires more information exchange and lower
information asymmetry. There is also evidence that women exhibit greater risk aversion in
financial decision making (Riley and Chow 1992; Powell and Ansic 1997; Hinz, McCarthy,
and Turner 1997; Sunden and Surette 1998) and demonstrate less overconfidence than
men (Lundeberg, Fox, and Puncochar 1994). Lower-quality earnings are associated with
higher risks for the firm, its directors and its auditors. Heninger (2001) argues that audi-
tors face higher litigation risk when earnings quality is low. DuCharme, Malatesta, and
Sefcik (2004) show that earnings management at the time of stock offers leads to more fre-
quent lawsuits. As the body responsible for choosing and monitoring auditors, the board
faces greater litigation risk when investors are hurt by lower earnings quality. Several stud-
ies find an association between reputation loss and earnings management (Kaplan and
Ravenscroft 2004; Hunton, Libby, and Mazza 2006). Female directors, because they are
more averse to litigation and reputation loss, are likely to act more decisively than their
male counterparts in improving earnings quality.
We have argued that female directors improve board governance, which in turn is
likely to improve the quality of earnings. However, some of the ‘‘effects’’ of female partici-
pation such as improved board attendance or greater exposure are observable characteris-
tics of the board. It is conceivable that the effect of female board participation on
earnings quality is subsumed by other observable board characteristics. Therefore, the
empirical question of interest is whether, after controlling for other observable characteris-
tics of the board, female director presence on the board is incrementally effective in
improving earnings quality. In summary, the literature suggests that firms with gender-
diverse boards are more likely to be associated with higher earnings quality. This is stated
in the following hypothesis:
Hypothesis: There is a positive association between female participation in the board and
the quality of earnings.
3. Research design
Measures of earnings quality
Our choice of earnings quality measures is based on the extent to which such a measure is
amenable to the monitoring actions of the board. Schipper and Vincent (2003) identify
12. Additional supporting anecdotal evidence is found in whistle-blowers Cynthia Cooper of Worldcom and
Sherron Watkins of Enron, who exposed corporate financial scandals, and Coleen Rowley of the FBI,
who exposed the agency’s slow action prior to the September 11, 2001 attacks. These three women were
selected as Time’s Persons of the Year in 2002. Brabeck (1984) notes that higher moral development indi-
viduals are more sensitive to integrity issues and apt to blow the whistle than those with lower levels of
moral development.

decision usefulness as the main criterion for measuring earnings quality based on the
Financial Accounting Stands Board’s Conceptual Framework and empirical tractability.
Literature in the area of earnings quality broadly identifies two ways of measuring quality:
(i) market-based measures such as earnings response coefficient that measure the quality of
earnings by its association with stock-based measures such as price, return or volume and
(ii) measures of the ability of current earnings to predict future cash flows and earnings.
We focus on the second criterion of earnings quality because board monitoring
induces the managers to exert more effort and exhibit greater caution in estimating accru-
als that are more reflective of future performance. The greater oversight also constrains
managers from inflating earnings when they fall shy of benchmarks. We choose the
accruals quality as the metric that best reflects the ability of current earnings to reflect
future cash flows. This choice is consistent with Francis et al. 2005 who argue that accru-
als quality is superior to other earnings quality measures in pricing information risk and
with Jones, Krishnan, and Melendrez 2008 who find that accruals quality best predicts
the incidence and magnitude of fraud relative to other commonly used measures of earn-
ings quality. We use benchmark measures because they directly reflect the restraining
influence of the board on managers under pressure to overstate earnings to beat the
benchmarks.
Accruals quality
Dechow and Dichev (2002) define accruals quality in terms of the extent to which current
accruals are associated with current, previous, and subsequent year cash flows. This defini-
tion of quality is premised on the assumption that earnings represent current operating
cash flows that are modified by accruals to be better predictors of future performance. A
good accrual estimate should be manifested as cash flow in the current or future periods.
A different view of earnings quality is that the quality is improved if the accruals embed-
ded in the earnings are not opportunistically distorted by managers. Jones and the modi-
fied Jones models (Jones 1991; Dechow, Sloan, and Sweeney 1995) use accruals
expectation models and compute abnormal accruals that are likely to reflect earnings man-
agement. McNichols (2002) combines the Dechow and Dichev model and the earnings
management models by including the change in revenue and property, plant, and equip-
ment as additional control variables in determining residuals. She uses the standard devia-
tion of the residuals from the modified regression over five years as an inverse measure of
accruals quality. However, the standard deviation of the residuals computed over five
years might reflect prior changes in diversity. We overcome this problem by using the
absolute value of the residual from the McNichols regression, a measure that is consistent
with footnote 6 of Dechow and Dichev 2002.
We estimate the accruals estimation error (AEE) as the absolute value of residual e2it
from the following annual cross-sectional regressions for each of 48 industry categories
(Fama and French 1997) with at least 20 firms in year t:
DWCit ¼ a0i þ a1j CFOi;t1 þ a2j CFOi;t þ a3j CFOi;tþ1 þ a4j DSalesi;t þ a5j PPEit þ e2it ð1Þ:
Here, i denotes firm and t denotes the year. Consistent with Francis et al. 2005, we
use the change in operating noncash working capital as the dependent variable, DWCit ,
computed as ðDCAssit DCashit Þ ðDCLit DSTDebtit Þ. Cash and short-term debt are
excluded because they do not represent operating accruals. All changes are between the
periods t ) 1 and t : DCAssit = change in current assets (COMPUSTAT #4); DCa-
shit = change in cash balance (COMPUSTAT #1); DCLit = change in current liabilities
(COMPUSTAT #5);DSTDebtit = change in short-term debt included in current liabilities
(COMPUSTAT #34); and CFOit = operating cash flow from the cash flow statement

(COMPUSTAT #308). All variables are scaled by average total assets. A high value of
AEE denotes poor accruals quality.
Dechow and Dichev (2002) identify firm size, volatility of sales, volatility of cash
flow, absolute value of the change in working capital, and the operating cycle as innate
firm-specific factors associated with AEE. These factors typically cannot be altered by
managers in the short term. Francis et al. (2005) define the remaining component of
accruals quality that cannot be explained by innate factors as discretionary accruals qual-
ity. Because we control for innate firm-specific characteristics, AEE measures (inverse)
discretionary accruals quality. We expect female board participation to be negatively
associated with AEE.
Benchmark measures: INCREASE and SURPRISE

Firms that systematically meet or beat earnings benchmarks such as previous year’s earnings
or analyst earnings forecasts are seen by the market as better performers and are rewarded
with stock price increases (Bartov et al. 2002; Jennings 1987). Anticipating this market reac-
tion, managers of firms whose unmanaged earnings fall marginally below the benchmarks
have incentive to manage earnings upwards so as to meet or beat previous earnings
(Burgstahler and Dichev 1997) or consensus analyst earnings forecasts (Burgstahler and
Eames 2003). These incentives for earnings management stem from the desire of managers to
maintain or increase the stock price (Graham, Harvey, and Rajgopal 2005; Hribar, Jenkins,
and Johnson 2006). Earnings that are managed upwards to meet or beat benchmarks are less
likely to be related to performance and are therefore likely to be of lower quality than
unmanaged earnings (see footnote 6). We hypothesize that female board participation is
negatively associated with meeting or beating these earnings benchmarks. Similar to Frankel,
Johnson, and Nelson 2002 and Ashbaugh, LaFond, and Mayhew 2003, we define
INCREASE as an indicator variable that takes a value of one when the difference in the net
income between periods t and (t ) 1), scaled by the market value of equity at the end of per-
iod (t ) 1), falls in the interval (0, 0.01), and zero otherwise. Similarly, we define SURPRISE
as an indicator variable that takes a value of one when the firm meets or beats the mean
I ⁄ B ⁄ E ⁄ S consensus previous-month forecast of earnings per share by less than one cent.
In additional tests, we also measure earnings quality by the performance-adjusted cur-
rent discretionary accruals. Cognizant that earnings management might well be employed
to signal managers’ foresight information about future performance, we control for perfor-
mance in the measurement of discretionary current accruals (Kothari et al. 2005). The
lower the absolute value of performance-adjusted discretionary current accruals, the higher
the earnings quality.
We measure female participation by three alternative variables that indicate the pres-
ence or absence of female directors on the board or of female nonexecutive directors or of
female directors on the audit committee.
Controlling for endogeneity — First-stage probit model

Endogeneity results if firms with higher earnings quality choose more female participation
on boards. We control for endogeneity with the two-stage Heckman 1976 procedure.
First-stage model
For the Heckman correction, we compute the inverse Mills ratio (IMR), ^k (Heckman
1976; Johnston and DiNardo 1997), from a probit model similar to that used by Hillman
et al. 2007 for predicting the presence of female directors on the board. Boone, Field,
Karpoff, and Raheja (2007) argue that diversification in the product market increases the
need for board independence. Linck, Netter, and Yang (2008) show that growth, research
and development, and stock volatility affect the demand for board monitoring. Cheng

(2008) shows an association between large boards and less variability in corporate perfor-
mance. Westphal and Stern (2007) contend that women directors are chosen more for their
monitoring than advising qualities. This argument is supported by the results of Adams
and Ferreira 2009. Based on the above studies, we include variables that measure sales
growth, stock volatility, and diversification. In addition, Adams and Ferreira (2009) and
Campbell and Mı́nguez-Vera (2008) suggest that firm performance is associated with
female board participation. We include therefore several performance variables, such as
accounting performance (ROA), Tobin’s Q, and market returns, as determinants of female
participation in the board. We include the age of the firm to control for potential alterna-
tive explanations for female representation, such as inertia (Hillman, Cannella, and Harris
2002). We include firm size as larger firms face greater pressure to conform to societal
expectations (DiMaggio and Powell 1985). Similar to Hillman et al. 2002, we believe that
the percentage of women employed in an industry influences the likelihood of female par-
ticipation in the boards of firms belonging to that industry. We use Bureau of Labor Sta-
tistics data to obtain the percentage of women employees in the two-digit SIC industry
category. The average number of outside directorships held by independent directors is
used to proxy for the demand for additional networking. We include all these variables in
our first-stage analysis. The notations and definitions of the variables used in both stages
are summarized in Exhibit 1.
Exhibit 1
Notation and definitions of variables
I. Female board participation variables

FP FDir or FNED or FAud
FDir 1 if there is at least 1 female director on board, 0 otherwise
FNED 1 if there is at least 1 female nonexecutive director on board, 0 otherwise
FAud 1 if there is at least 1 female director on the audit committee, 0 otherwise
II. Earnings quality and related variables

BENCHMARK INCREASE or SURPRISE
INCREASE 1 when the change in net income scaled by MVE(t ) 1) is within the
interval [0, 0.01), 0 otherwise
SURPRISE 1 if the firm’s net income per share meets the mean analysts forecast or
beats it by less than 1 cent, 0 otherwise
AEE Absolute value of firms i’s residuals in t from annual cross-sectional
estimations of the McNichols 2002 model
III. Control variables in the first stage: Determinants of female director presence
ROA Return on assets defined as net income before extraordinary items divided
by average total assets
Size Natural log of total assets at the beginning of the year
FirmAge The number of years form which total assets was reported in
COMPUSTAT since 1977
SalesGrth Average of the year-to-year percentage change in sales over preceding 3 years
Directorships Average number of outside directorships held by nonexecutive directors
P
DT Total diversification defined in Palepu 1985 as Pi lnð1 Pi Þ, where Pi
i¼1
is the share of the ith industry segment in the total sales of the firm.
Consistent with Palepu 1985, we define industry segments as four-digit SIC
industry categories in which the firm operates
(The exhibit is continued on the next page.)

Exhibit 1 (Continued)
TotRisk Standard deviation in daily returns over a company’s fiscal year

(standardized to a mean of 0 and a standard deviation of 1)
Q Tobin’s Q, the book value of assets minus the book value of equity, plus the
market value of equity, scaled by the book value of assets
Ret The annual return measured over the fiscal year
Vwretd The valued weighted market return measured over the fiscal year
IndFpct The percentage of employees who were women in each two-digit SIC
industry category
IV. Control variables in the second stage

DirTen Average number of years the directorship has been active
CGBoarda Principal component with the largest eigenvalue of the covariance matrix of
the board governance variables
CEOPower (CEO = chairman dummy + CEO = founder dummy + CEO = only
insider dummy) ⁄ 3
DLoss 1 if the firm reports a net loss, 0 otherwise
LnMVE The natural logarithm of the firm’s market value of equity
TCA(t )1) Last year’s total current accruals computed as net income before
extraordinary items plus depreciation and amortization minus operating
cash flows scaled by beginning of year total assets
Mergeracq 1 if the firm is engaged in a merger or acquisition, and 0 otherwise
Financing 1 if Mergeracq is not equal to 1 and any of the following conditions apply:
long-term debt increased by 20 percent or more, number of shares
outstanding increased by 10 percent or more after controlling for stock
splits, and 0 otherwise
Leverage The ratio of total debt to total assets
MVBV Firm’s market-to-book ratio defined as its market value of equity divided by
book values
Litigation 1 if the firm operates in a high-litigation industry, 0 otherwise
(high-litigation industries are industries with SIC codes of 2833–2836,
3570–3577, 3600–3674, 5200–59614, and 7370–7370)
CFO Cash flow from operations, scaled by beginning of year total
assets
BDSize The natural logarithm of the number of total board members
^
k Inverse Mills ratio computed from the first stage probit
regression
a
CGBoard is determined using principal component analysis by the following factors:
Factors Component loading Standard error
Anddirpct 0.6085 0.1539

Affdirpct 0.5053 0.1291
Insiderspctg )0.0353 0.1901
Oldavgdirten )0.1563 9.3516
OlddirNoshrpct )0.0429 0.2617
Bdmtgs 0.1372 4.4620
Dirattendpct 0.0419 0.0444
(The exhibit is continued on the next page.)

Exhibit 1 (Continued)
Factors Component loading Standard error
Numtotaldir 0.2154 4.7339

NumACDir 0.1847 1.4618
Binddirpct 0.2171 0.1272
Baffdirpct )0.2486 0.0437
Binsdirpct )0.0786 0.0376
Big 4 ⁄ 5 0.0836 0.2753
V. Additional control variables used in discretionary AEE regression

StdSales Standard deviation of firm’s sales for the previous 7 years
DWC Change in noncash operating working capital (DAR + DInventory ) DAP ) DTP +
DOther Assets (net)), where AR is accounts receivable, AP is accounts payable,
and TP is taxes payable. The changes are computed from year t ) 1 to t for
all the variables.
AvgjDWCj Average of absolute value of DWC over two years from year t ) 1to t
AvgOC Average of operating cycle over year t ) 1 and t where operating cycle =
360 ⁄ (sales average AR) + 360 ⁄ (cost of goods sold) ⁄ (average inventory)
Anddirpct Fraction of independent directors in the board
Affdirpct 1 – [#of affiliated directors (nonexecutive outside related) ⁄ Total # of directors]
Insiderspctg Fraction of outstanding shares held by insiders
Oldavgdirten Average number of years the directors who are older than 70 have been active
OlddirNoshrpct Fraction of directors who are older than 70 with no shareholding in the firm
Bdmtgs Board meetings, number of full board meetings
Dirattendpct Fraction of directors who have attended over 75 percent of meetings
Numtotaldir Number of board directors
NumACdir Number of directors on audit committee
Binddirpct Busy outsiders, i.e., fraction of independent directors who serve on four or more
other boards
Baffdirpct Busy affiliated, fraction of affiliated directors who serve on four or more other
boards
Binsdirpct Busy insiders, fraction of insider directors who serve on four or more other
boards
Big 4 ⁄ 5 1 if firms audited by Big 4 ⁄ 5, 0 otherwise
Total variance 132.1514466
Largest eigenvalue of the covariance matrix
Eigenvalue Difference Proportion
1 (Largest) 87.7060695 0.6637
In our prediction models, we measure organizational size (Size) by the natural loga-
rithm of total assets.13 Firm age (FirmAge) is the number of years that the firm reported
assets on COMPUSTAT after 1977. Sales growth (SalesGrth) is the year-to-year percent-
age change in sales over a three-year period ending in the current year. The number of
external links is measured by the average number of outside directorships (Directorships)
13. We use total assets to control for size in the probit model and market value of equity to control for size
in the other regressions, consistent with prior studies using similar models (e.g., Ashbaugh et al. 2003).
The results are similar if we use total assets for all of the tests.

held by nonexecutive directors of the firm. Consistent with Hillman et al. 2007, we mea-
sure diversification (DT) using the entropy measure14 of Palepu 1985 and total risk (Tot-
Risk) by the standard deviation of daily stock returns over the fiscal year standardized to
a mean of 0 and standard deviation of 1 over all the firms. Tobin’s Q is computed as (the
book value of assets – the book value of equity + the market value of equity) scaled by
the book value of assets.15 The firm’s accounting and market performances are measured
respectively by ROA and stock return (Ret) over the fiscal year. Other control variables
include the value-weighted market return measured over the fiscal year (Vwretd), the per-
centage of female employees in the two-digit SIC industry category (IndFpct), and a year
dummy for 2001. The probit model is
Pr½Fit ¼ 1 ¼ U½c0 þ c1 ROAit þ c2 Sizeit þ c3 FirmAgeit þ c4 SalesGrth þ c5 Directorships
þ c6 DT þ c7 TotRisk þ c8 Q þ c9 Ret þ c10 Vwretd þ c11 IndFpct þ c12 Yr01 ð2Þ:
The function F[.] denotes the probit function. In the above equation, i denotes the
firm; t denotes the year (2001–2007); Fit is set equal to one if there is at least one female
director (non-executive director) on the board of firm i in year t, and zero otherwise.
Second-stage models for testing the hypothesis

Control for board governance
Although female participation might improve board monitoring, other board variables
such as board independence might capture this effect. The use of female board participa-
tion as an additional variable to explain board governance is useful if the effect of such
participation is not already reflected in other measures of board governance.16 In order to
test this, we control for two measures of board governance. The first is an index derived
from the board governance variables identified by Larcker et al. 2007. The second variable
is an index of CEO power.
Larcker et al. (2007) identify corporate governance indicators in seven categories
including board governance. Our primary interest in this paper is on the effect of female
participation on the board. In particular, we need to control for board governance
variables that might proxy for the association between female participation and earnings
quality. Therefore, out of the seven categories identified by Larcker et al. 2007, we focus
on the first two: board governance and the percentage of shareholding by inside directors
and executives.17 We also include an indicator variable for audit by Big 4 auditors for two
reasons: prior literature shows that earnings quality is higher for firms audited by Big 4
auditors, and Gul et al. (2008) show that firms with female board participation demand
higher audit quality. We construct a board governance index, CGBoard, defined as the
principal component with the highest eigenvalue of the covariance matrix comprised of the
14. The entropy measure is given in Appendix 2 of Palepu 1985 as R Pi lnð1=pi Þ, where Pi is the share of the
i¼1
ith industry segment in the total sales of the firm. Consistent with Palepu 1985, we define industry seg-
ments as the four-digit SIC industry categories in which the firms operate.
15. We use Tobin’s Q in the first stage to be consistent with Hillman et al. 2007. In the second stage, we use
the market to book ratio, MVBV, which proxies for growth in the determination of earnings quality.
16. Even if the effect of female participation is reflected in other board variables, female participation might
serve as a useful aggregate of a diverse number of variables that explain the efficacy of board governance.
17. The other categories include stock ownership by institutions, activist holders, debt and preferred stock
holdings, compensation mix variables and anti-takeover devices. It is unlikely that the last four categories
might reflect female board participation. Institutional ownership is not directly associated with female
board participation but including it as a variable significantly reduces the sample size.

following variables: (i) percentage of independent directors on the board, (ii) percentage of
nonaffiliated directors,18 (iii) percentage of shareholding by inside directors and executives,
(iv) average tenure of old directors who are more than 70 years of age, (v) fraction of old
directors who are not shareholders, (vi) number of full board meetings, (vii) percentage of
directors who attended more than 75 percent of the meetings, (viii) board size measured
by the number of directors, (ix) number of directors on the audit committee, (x) percent-
age of independent directors who serve on four or more other boards, (xi) percentage of
affiliated directors who serve on four or more other boards, (xii) percentage of inside
directors who serve on four or more other boards, and (xiii) indicator variable for audit
by Big 4 firms. The first three variables measure board independence, variables (iv) and (v)
measure participation by old directors, variables (vi) and (vii) measure board diligence,
variables (viii) and (ix) measure board and audit committee sizes, variables (x) to (xii)
measure the ‘‘busyness’’ of board members and the last variable measures the audit qual-
ity.19 Principal component analysis of the variables yields the first eigenvector that explains
66.37 percent of the total variation in the set of board governance variables. For the main
analysis, we use the principal component, CGBoard, as a control variable in the second
stage analyses as a determinant of earnings quality. Exhibit 1 gives the component load-
ings of the variables and the definitions of all variables used in the study. We also run
regressions using all 13 corporate governance variables as control variables and discuss the
results of this analysis in the section on additional tests.
CEOPower is computed as an average of three indicator variables: (i) indicator vari-
able for CEO also being the chairman of the board, (ii) indicator variable for CEO being
the founder of the firm, and (iii) CEO is the only insider in the board. Prior literature on
CEO duality suggests that combining the duties of CEO and chairman could impair the
ability of the board to exercise oversight (Finkelstein and D’Aveni 1994; Millstein 1992).
Dechow et al. (1996) identify two factors from a factor analysis of governance variables:
low oversight of management, and CEO power over the board. Their low oversight factor
consists of percentage of insiders on the board, percentage holdings of insiders and an
indicator variable for CEO = founder. The first two variables have been included in our
board governance index. Therefore, we include CEO = founder indicator variable under
the CEOPower variable. Furthermore, if CEO is the only insider on the board, all the
information that is passed on to the directors is channeled through the CEO, which gives
him or her considerable power over the decisions of the board and impairs oversight.
Accruals quality
The association between female board participation and accruals quality is tested using the
following model:
AEE ¼ h0 þ h1 FP þ h2 DirTen þ h3 CEOPower þ h4 DLoss þ h5 LnMVE þ h6 STDðSalesÞ
þ h7 AvgjDWcj þ h8 AvgOC þ h9 CGboard þ h10 k^ þ R h11k Yearsk þ e ð3Þ:
k
18. Affiliated or ‘‘grey’’ directors are those independent directors on a given board that have or have had a
significant relationship with the company (definition from Corporate Library’s Board Analyst database).
Larcker et al. (2007) use the percentage of affiliated directors in the audit committee, but this data is not
publicly available. Instead, we use the percentage of nonaffiliated directors on the whole board.
19. Larcker et al. (2007) include some other variables that are not available in the Corporate Library database
(but available in the private database, equilar, used by them) such as the number of audit committee meet-
ings, indicator variable for whether the audit committee chair is an affiliated director, and the fraction of
affiliated and outside directors that were appointed by the existing insiders. They also use a few variables
on the compensation committee that are also not available in the Corporate Library database.

AEE is the absolute value of the accrual estimation error from (1), an inverse measure
of accruals quality. The female board participation variable FP = FDir, FNED or FAud are
the indicator variables denoting the presence of female director, female nonexecutive direc-
tor, or female audit committee member, respectively, on the board. We control for DirTen
that measures director experience and is defined as the average number of years that direc-
tors have been on the board — a variable that has not been included in CGBoard. CGBoard
and CEOPower, described earlier, control for other board governance variables. LnMVE is
the natural logarithm of the market value of equity and DLoss is an indicator variable
denoting a reported loss in the year. We are interested in the association between female
board participation and the discretionary part of AEE. Therefore, in addition to the board
governance variables, we control for innate factors that affect AEE (Dechow and Dichev
2002; Francis et al. 2005). These innate factors include StdSales, the standard deviation of
the firm sales over the most recent seven years; Avg|DWC|, the average change in annual
working capital over the last two years; and AvgOC, the average operating cycle over the
last two years, where the operating cycle in days is computed as (Dechow and Dichev 2002):
360 360
OC ¼ þ :
Sales=AverageAR Costofgoodssold=AverageInventory
If the firm does not have inventory, then the second term is dropped. The control vari-
ables for the innate part of accruals quality in (3) are drawn from Model 4 in panel C,
Table 4, of Dechow and Dichev 2002. The inverse Mills ratio k ^ is included to control for
endogeneity. We include fixed effects for years to control for secular movements of AEE
over the years. AEE has been computed for each industry separately and therefore we do
not include industry controls in this regression.
We expect a negative coefficient for DirTen because experienced directors are more
knowledgeable about the firm and are able to monitor and scrutinize managerial reports
more effectively. Likewise, we expect negative coefficients for the board governance vari-
able CGBoard. CEOPower indicates that the CEO has greater ability to manage earnings
and therefore we expect a positive coefficient. We expect a negative association between
female board participation and AEE.
Earnings benchmark measures

We use the following logit model to test the association between female board participa-
tion (FP) and benchmark measures:
Pr½BENCHMARK ¼ 1 ¼ L½h0 þ h1 FP þ h2 DirTen þ h3 CEOPower þ h4 MVBV
þ h5 Litigation þ h6 LnMVE þ h7 DLoss þ h8 CGBoard þ h9 ^k
þ R h10k Yearsk þ R h11k INDk ð4Þ:
k k
. In (4), BENCHMARK = either INCREASE or SURPRISE. L[.] denotes the logistic

function. FP and board governance variables are defined as before. MVBV is the ratio of the
market value of equity to the book value. Litigation is an indicator variable that takes a value
of one if the firm is in a high-litigation industry and zero otherwise.20 The inverse Mills ratio
^ is included to control for endogeneity. We control for both year and industry fixed effects.
k
As in the case of accruals quality, we expect negative coefficients for DirTen and the
board governance variable CGBoard. CEOPower indicates that the CEO has greater abil-
ity to manage earnings to meet benchmarks and therefore we expect a positive coefficient.
20. High-litigation industries are industries with an SIC code of 2833–2836, 3570–3577, 3600–3674, 5200–
5961, or 7370–7370.

Managing earnings to meet benchmarks also increases the risk of shareholder litigation.
Therefore, we expect a negative coefficient for Litigation. The market-to-book ratio
(MVBV) controls for the effect of growth on meeting or beating benchmarks. Firms with
high MVBV exhibit higher growth potential and are therefore more likely to beat the pre-
vious period earnings. Therefore, we expect a positive association between MVBV and
INCREASE. However, the growth expectations of analysts could have optimistic bias,
making them more difficult to beat. Therefore, we do not have any directional expectation
of the association between MVBV and SURPRISE. We expect LnMVE (proxy for firm
size) to be positively and DLoss to be negatively related to the benchmark variables, con-
sistent with earlier studies (Ashbaugh et al. 2003).
4. Empirical analysis and results

The sample
Our sample data are taken from the S&P COMPUSTAT, Corporate Library’s Board Ana-
lyst, and IRRC databases for the period 2001–2007. The availability of director tenure,
number of meetings, and other data required for the analysis restricts us to 2001 as the
beginning year. Table 1 gives the sample selection details. Exhibit 1 gives the definitions of
the variables used in our analyses.
First, we include all firms with gender information on directors in the Corporate
Library Board Director database. This gives us 13,848 firm-year observations. We delete
firm-year observations with missing information on corporate governance board factors,
or market information to compute total risk and annual returns. We use the I ⁄ B ⁄ E ⁄ S
mean consensus analyst forecast closest to the earnings announcement date to compute
SURPRISE. After excluding firms with missing values for the BENCHMARK variables,
the benchmark analysis sample has 3,132 observations. For the sample used to test the
association between female board participation and accruals quality, we also need to
remove observations that lack the data needed to compute AEE. This gives a sample of
2,480 firm-year observations. For the purpose of providing descriptive statistics, we use
the larger sample of 3,132 firm years that we have used for benchmark analysis.21
Table 2 reports the distribution of firms over industry and year with and without
female directors. More than 90 percent of the female directors are nonexecutive directors.
In contrast, only 67 percent of male directors are nonexecutive directors.22 Firms with
female directors outnumber firms with all-male boards in all industries except the follow-
ing: Automobiles and Trucks, Petroleum and Natural Gas, Electronic Equipment, Measur-
ing and Control Equipment, and Trading.
Table 3 presents the descriptive statistics for the aggregate sample and the descriptive
statistics and results of the t-tests of the mean differences between samples with and with-
out female directors.
We find that AEE is lower but the benchmark means are higher for firms with female
directors, which is a mixed univariate result. The performance measured by ROA is higher
but growth measured by SalesGrth is lower for the sample with female directors.
21. We test for the representativeness of the samples in these analyses by comparing the size (average of the
log of total assets over the seven years), performance (average return on assets over the seven years), lever-
age (average ratio of long-term debt to equity), and growth (average annual sales growth) of each of the
samples with a broader sample from COMPUSTAT. We find that only the return on assets variable is sig-
nificantly higher for our sample. In our tests, adding ROA as an additional control variable does not
change the results. We also conduct tests on a larger sample (5416 firm-years) in which we do not include
CGBoard but control individually for proportion of independent directors and number of board meetings
(diligence) and get qualitatively similar results. Therefore, the difference between the larger original sample
and the sample analyzed in the paper does not seem to reduce the generalizability of our results.
22. In firms with (without) gender-diverse boards, 70 percent (65 percent) of male directors are nonexecutive.

TABLE 1
The sample
Total
2001 2002 2003 2004 2005 2006 2007 firm-years
Firms with director gender 1359 1439 1602 1837 1906 2806 2899 13848
information in Corporate
Library database
Firms both in Corporate 1149 1208 1367 1574 1605 2526 2530 11959
Library and the S&P
COMPUSTAT without
missing values in calculating
earnings benchmark
Less:
Missing corporate (694) (702) (803) (859) (871) (818) (745) (5492)
governance board factors
Firms audited by non–Big (12) (10) (10) (17) (37) (196) (237) (519)
4⁄5
Missing income before (153) (176) (217) (302) (286) (717) (715) (2566)
extraordinary items
Missing return on assets (5) (8) (13) (16) (24) (41) (39) (146)
Missing number of business (0) (0) (1) (0) (0) (52) (0) (53)
segments
Missing sales growth (10) (0) (2) (1) (0) (14) (0) (27)
Missing other variables (6) (3) (3) (1) (4) (3) (4) (24)
Firms remaining
Firms used in benchmark 269 309 318 378 383 685 790 3132
analysis
Firms with no missing 218 257 262 308 301 533 601 2480
values for the variables
needed in accruals quality
analysis
Consistent with our expectation, female directors are more likely to be represented on the
boards of large and old firms compared to small and young firms. Corporate governance
variables, NEDProp, NumMgts, and Directorships, are all higher for firms with female
directors. CGBoard is significantly higher for the sample with female directors. It is also
seen that CEOPower is higher in firms with female directors. Based on prior literature
(Adams and Ferreira 2009), female directors restrain CEO’s abuse of power and the posi-
tive association between CEOPower and female board participation suggests that boards
with powerful CEOs might seek female board participation to constrain the use of CEO’s
power. Director tenure is lower in firms with female directors than in those without them.
The propensity for losses (DLoss) is significantly higher when there are no female direc-
tors. The average absolute change in working capital (Avg(|DWC|)) and the average oper-
ating cycle are higher for firms with no female directors. These differences could be
attributable either to lower industry-specific norms for industries in which there is greater
female board participation or to the inefficiency of managers in firms with no female par-
ticipation in controlling the length of the process.
Table 4 gives the Pearson and the Spearman rank correlations among the variables.
Consistent with the univariate descriptive statistics in Table 3, we find that FDir,

TABLE 2
Distribution of at least one female director across various industries (Number of at least one female
nonexecutive director in parentheses)
Firm-years with at least

Firm-years with one female director
no female directors (nonexecutive director) Total number
on the board on the board of firm-years
Industry 2001–2007 2001–2007 2001–2007
Food products 10 74 (71) 84

Recreation 2 3 (3) 5
Entertainment 18 24 (26) 42
Printing and Publishing 7 50 (49) 57
Consumer Goods 22 81 (79) 103
Apparel 12 36 (32) 48
Healthcare 19 50 (43) 69
Medical Equipment 28 74 (64) 102
Pharmaceutical Products 47 142 (135) 189
Chemicals 23 79 (82) 102
Rubber and Plastic Products 5 11 (11) 16
Textiles 32 47 (40) 79
Construction Materials 1 2 (2) 3
Steel Work etc. 35 49 (49) 84
Machinery 65 90 (95) 155
Electrical Equipment 28 32 (33) 60
Automobiles and Trucks 39 31 (30) 70
Petroleum and Natural Gas 99 78 (74) 177
Utilities 34 242 (237) 276
Communication 14 40 (32) 54
Personal Services 14 36 (36) 50
Business Services 72 166 (160) 238
Computers 26 34 (34) 60
Electronic Equipment 135 84 (83) 219
Measuring and Control Equipment 55 38 (34) 93
Business Supplies 15 61 (64) 76
Transportation 70 74 (62) 144
Wholesale 48 87 (78) 135
Retail 45 216 (200) 261
Restaurant, Hotels, Motels 15 52 (48) 67
Trading 10 4 (4) 14
Total 1045 2087 (1990) 3132
FNED, and FAud are positively correlated with CGBoard and CEOPower. They are
negatively correlated with volatility measures such as the standard deviation of sales
and the average absolute change in working capital, and the propensity for losses.
However, the correlation magnitudes do not indicate serious multicollinearity issues in
our analysis.23
23. Variance inflation factors calculated for all of our tests indicate no problems.

TABLE 3
Descriptive statistics
1626
No female director on At least one female director on the

Full sample (N = 3132) the board (N = 1045) board (N = 2087)
Variable Mean Median Std Dev Mean Median Std Dev Mean Median Std Dev p-value
INCREASE 0.2031 0.0000 0.4023 0.1407 0.0000 0.3479 0.2343 0.0000 0.4237 <0.0001
SURPRISE 0.2251 0.0000 0.4177 0.1847 0.0000 0.3882 0.2453 0.0000 0.4304 <0.0001
AEEa 0.0310 0.0247 0.0234 0.0338 0.0279 0.0223 0.0296 0.0232 0.0252 <0.0001
FDir 0.6664 1.0000 0.4716

FNED 0.6363 1.0000 0.4811
FAud 0.3790 0.0000 0.4852
ROA 0.0414 0.0489 0.0978 0.0350 0.0475 0.1059 0.0447 0.0497 0.0933 0.0088
Size 7.5858 7.4666 1.4843 6.8559 6.7346 1.2139 7.9512 7.8416 1.4728 <0.0001
FirmAge 22.3409 23.6667 8.9909 19.8713 17.9167 8.6029 23.5775 27.5833 8.9279 <0.0001
SalesGrth 0.0181 0.0048 0.1444 0.0229 0.0039 0.1638 0.0158 0.0052 0.1336 0.1942
Contemporary Accounting Research
Directorships 2.1034 2.0000 0.8957 1.9200 1.7500 0.8471 2.1953 2.0000 0.9055 <0.0001
DT 0.6894 0.6932 0.4382 0.6605 0.6932 0.4155 0.7039 0.6932 0.4486 0.0091
TotRisk )0.3093 )0.3871 0.3863 )0.1709 )0.2210 0.3866 )0.3787 )0.4587 0.3671 <0.0001
Q 1.9707 1.6052 1.2222 1.9909 1.6102 1.2741 1.9606 1.6022 1.1955 0.5129
Ret 0.0101 0.0091 0.0897 0.0103 0.0079 0.1024 0.0100 0.0093 0.0827 0.9223
Vwretd 0.0058 0.0108 0.0302 0.0048 0.0108 0.0317 0.0063 0.0108 0.0294 0.1904
IndFpct 0.3607 0.3348 0.1530 0.3474 0.3528 0.1494 0.3673 0.3346 0.1544 0.0006
DirTen 10.0115 9.4444 3.8071 10.5344 9.8889 4.1542 9.7496 9.2308 3.5935 <0.0001
CEOPower 0.1963 0.3333 0.2173 0.1821 0.0000 0.2272 0.2033 0.3333 0.2118 <0.0001
MVBV 3.1631 2.2152 5.2233 2.6908 2.0909 2.3516 3.3997 2.3078 6.1656 0.0003
Litigation 0.2586 0.0000 0.4380 0.2660 0.0000 0.4421 0.2549 0.0000 0.4359 0.5030
LnMVE 7.6065 7.4730 1.5463 6.9265 6.8521 1.2310 7.9470 7.8580 1.5757 <0.0001
CGBoard 0.2036 0.3202 1.4980 )0.3181 )0.2646 1.3046 0.4648 0.6862 1.5205 <0.0001
TCA (t ) 1) )0.0093 )0.0055 0.0768 )0.0093 )0.0066 0.0967 )0.0092 )0.0050 0.0646 0.9776
Mergeracq 0.2270 0.0000 0.4190 0.2546 0.0000 0.4358 0.2132 0.0000 0.4097 0.0092
(The table is continued on the next page.)

TABLE 3 (Continued)
No female director on At least one female director on the

Full sample (N = 3132) the board (N = 1045) board (N = 2087)
Variable Mean Median Std Dev Mean Median Std Dev Mean Median Std Dev p-value
Financing 0.1846 0.0000 0.3880 0.1828 0.0000 0.3867 0.1854 0.0000 0.3887 0.8565
Leverage 0.2373 0.2306 0.1686 0.2154 0.2073 0.1790 0.2483 0.2407 0.1621 <0.0001
CFO 0.1090 0.1042 0.0998 0.1075 0.1017 0.1193 0.1097 0.1056 0.0884 0.5571
BDSize 2.4285 2.3979 0.3468 2.2421 2.1972 0.3078 2.5219 2.4849 0.3270 <0.0001
StdSalesa 0.1760 0.1291 0.2185 0.2155 0.1502 0.3273 0.1566 0.01180 0.1327 <0.0001
DWCa 0.0166 0.0133 0.0697 0.0183 0.0157 0.0855 0.0158 0.0124 0.0604 <0.4032
AvgjDWCja 0.0468 0.0336 0.0461 0.0579 0.0416 0.0566 0.0413 0.0299 0.0389 <0.0001
AvgOCa 131.5981 114.6428 275.6512 148.0611 125.3528 458.4315 123.5396 107.0048 100.9704 <0.0374
Notes:
a
Number of observations is 2480, out of which 815 is for FDir = 0 and 1665 is for FDir = 1.
All variable definitions are given in Exhibit 1.
Female Directors and Earnings Quality

1627
1628
TABLE 4
Pearson ⁄ Spearman correlation matrix
Variable INCREASE SURPRISE AEEa FDir FNED FAud DirTen CEOPower MVBV Litigation LnMVE
INCREASE 1.0000 0.1935*** )0.1150*** 0.1098*** 0.1077*** 0.0556*** 0.0070 0.0570*** 0.1986*** )0.0081 0.1814***
SURPRISE 0.1935*** 1.0000 )0.1048*** 0.0685*** 0.0737*** 0.0958*** 0.0119 0.0609*** 0.2185*** )0.0023 0.1998***
AEEa 1.0000 0.0962*** 0.1906***

)0.0920*** )0.0892*** )0.1381*** )0.1275*** )0.1189*** )0.0689*** )0.0407** )0.2401***
FDir 0.1098*** 0.0685*** )0.0794*** 1.0000 0.8375*** 0.5500*** )0.0792*** 0.0625*** 0.0878*** )0.0120 0.3191***
FAud 0.0556*** 0.0958*** )0.0639** 0.5500*** 0.5536*** 1.0000 )0.0779*** 0.1206*** 0.0389** )0.0300* 0.2083***
DirTen 0.0095 0.0081 )0.0968 )0.0972*** )0.1631*** )0.0893*** 1.0000 )0.0349* )0.0410** )0.0133 )0.1045***
CEOPower 0.0506*** 0.0468*** )0.0315** 0.0460** 0.0617*** 0.1031*** )0.0486*** 1.0000 0.0441** )0.0271 0.1669***
MVBV 0.1047*** 0.1088*** 0.0653 0.0640*** 0.0744*** 0.0278 )0.0619*** 0.0330* 1.0000 0.1126*** 0.4478***
Contemporary Accounting Research
Litigation )0.0081 )0.0023 0.2016*** )0.0120 )0.0173 )0.0300* )0.0233 )0.0133 0.0541*** 1.0000 0.0617***
LnMVE 0.1816*** 0.2010*** )0.1850*** 0.3112*** 0.3178*** 0.2035*** )0.1176*** 0.1389*** 0.1866*** 0.0927*** 1.0000
CGBoard 0.0195 0.0326* )0.0174*** 0.2465*** 0.3481*** 0.1910*** )0.3862*** 0.2355*** 0.0758*** )0.0062 0.2793***
TCA (t ) 1) 0.0166 )0.0155 )0.1537 0.0005 )0.0020 )0.0215 0.0253 )0.0365** )0.0311* )0.0710*** )0.0257
Mergeracq 0.0031 )0.0110 )0.0038*** )0.0465*** )0.0451** )0.0384** )0.0420** )0.0077 )0.0333* )0.0068 0.0958***
Financing )0.0008 0.0294 0.0362** 0.0032 0.0106 )0.0052 )0.0072 0.0135 0.0624*** )0.0235 0.0139
Leverage )0.0789*** )0.0849*** )0.1384*** 0.0921*** 0.0938*** 0.0361** )0.1493*** 0.0131 0.0671*** )0.0793*** 0.0524***
CFO 0.1446*** 0.1140*** )0.0938*** 0.0105 0.0009 )0.0018 0.0734*** 0.0388** 0.1335*** )0.0321* 0.2824***
BDSize 0.0525*** 0.0816*** )0.1799*** 0.3805*** 0.4305*** 0.2433*** )0.2114*** )0.1027*** 0.0284 )0.0066 0.4210***
StdSalesa )0.0908*** )0.0455** 0.1914*** )0.1266*** )0.0996*** )0.0677*** )0.0042 0.0330 )0.0363* )0.0130 )0.1617***
AvgjDWCja )0.0904*** )0.0684*** 0.2915*** )0.1692*** )0.1451*** )0.1396*** 0.0148 )0.0489 )0.0095 )0.0094 )0.2135***
AvgOCa )0.0088 )0.0236 0.1279*** )0.0418** )0.0423** )0.0387* )0.0112 )0.0253 0.0131 0.0832*** )0.0446**
(The table is continued on the next page.)

TABLE 4 (Continued)
Variable DLoss CGBoard TCA(t ) 1) Mergeracq Financing Leverage CFO BDSize StdSalesa AvgjDWCja AvgOCa
INCREASE )0.1739*** 0.0212 )0.0045 0.0031 )0.0008 )0.0759*** 0.1823*** 0.0563*** )0.1625*** )0.0926*** )0.0283
SURPRISE )0.1868*** 0.0388** )0.0253 )0.0110 0.0294 )0.0796*** 0.1588*** 0.0822*** )0.0810*** )0.0605*** )0.0689***
AEEa 0.2458*** )0.0679*** )0.1017*** 0.0085 0.0145 )0.1966*** )0.0416** )0.2254*** 0.3424*** 0.2952*** 0.3110***
FDir )0.0914*** 0.2776*** 0.0054 )0.0465*** 0.0032 0.1068*** 0.0208 0.3836*** )0.1547*** )0.1578*** )0.1251***
FNED )0.0680*** 0.3659*** 0.0049* )0.0451** 0.0106 0.1093*** 0.0130 0.4344*** )0.1459*** )0.1325*** )0.1331***
FAud )0.0622*** 0.2140*** )0.0301* )0.0384** )0.0052 0.0502*** 0.0020 0.2490*** )0.0752*** )0.1334*** )0.1185***
DirTen )0.0507*** )0.3599*** 0.0482*** )0.0408** )0.0005 )0.1252*** 0.0827*** )0.1603*** )0.0399** 0.0013 0.0854***
CEOPower )0.0518*** 0.2366*** )0.0551*** )0.0071 0.0128 0.0286 0.0375** )0.0681*** 0.0119 )0.0562*** )0.0210
MVBV )0.1397*** 0.0600*** )0.0786*** 0.0019 0.0897*** )0.0780*** 0.4161*** 0.0374** )0.0524*** 0.0001 0.0713***
Litigation 0.1224*** )0.0085 )0.0598*** )0.0068 )0.0235 )0.0893*** 0.0376** )0.0067 0.0639*** 0.0095 0.1626***
LnMVE )0.2642*** 0.3085*** )0.0357** 0.0953*** 0.0180 0.1030*** 0.3142*** 0.4179*** )0.2137*** )0.2309*** )0.0821***
CGBoard )0.0124 1.0000 0.0182 0.0162 0.0151 0.1508*** )0.0380** 0.3207*** )0.0780*** )0.0888*** )0.0532***
TCA (t ) 1) )0.0707*** 0.0193 1.0000 )0.0037 )0.0327* 0.0445** )0.0753*** 0.0204 )0.0173 0.0904*** 0.0518***
Mergeracq )0.0158 0.0206 0.0305* 1.0000 )0.2578*** 0.1070*** 0.0916*** 0.0415** 0.0485** 0.0137 0.0337*
Financing 0.0040 0.0186 )0.0355** )0.2578*** 1.0000 0.0547*** 0.0053 )0.0200 0.0078 0.0756*** )0.0410**
Leverage 0.0736*** 0.1181*** 0.0518*** 0.1273*** 0.0524*** 1.0000 )0.2010*** 0.1787*** )0.1133*** )0.2056*** )0.1728***
CFO )0.3875*** )0.0161 )0.0038 0.0715*** )0.0261 )0.1555*** 1.0000 )0.0005 )0.0654*** )0.0228 )0.0824***
BDSize )0.0597*** 0.3061*** )0.0009 0.0407* )0.0193 0.1767*** )0.0178*** 1.0000 )0.2238*** )0.2150*** )0.1482***
StdSalesa 0.0484** )0.0658*** 0.0026 0.0029 0.0044 )0.0922*** )0.0741*** )0.1298*** 1.0000 0.3267*** )0.0598***
AvgjDWCja 0.1123*** )0.0972*** 0.0893*** 0.0020 0.0737*** )0.1571*** )0.0914 )0.1812*** 0.3590*** 1.0000 0.1335***
AvgOCa 0.0996*** )0.0202 0.0062 )0.0077 )0.0061 )0.0019 )0.0251 )0.0300 )0.0436** 0.0183 1.0000
Notes:
a
Number of observations is 2,480.
Pearson ⁄ Spearman correlation is shown below ⁄ above the diagonal.
***, **, * Statistically significant at the 0.01, 0.05, and 0.1 levels (two-tailed), respectively.

1629
TABLE 5
First-stage analysis. Probit model for female participation on the board
Pr½Fit ¼ 1 ¼ c0 þ c1 ROAit þ c2 Sizeit þ c3 FirmAgeit þ c4 SalesGrth þ c5 Directorships
þ c6 DT þ c7 TotRisk þ c8 Q þ c9 Ret þ c10 Vwretd þ c11 IndFpct þ R c12k Yearsk þ e
k
FDir FNED FAud

Pred.
Fit = Parameter sign Coefficient Chi-square Coefficient Chi- square Coefficient Chi-square
Intercept ? )2.5667*** 171.73 )2.5109*** 171.24 )1.9825*** 114.95

ROA ? )0.8438*** 9.46 )0.9277*** 11.57 )0.6664** 5.89
Size + 0.2785*** 155.83 0.2734*** 156.13 0.1498*** 52.19
FirmAge + 0.0165*** 29.97 0.0160*** 29.17 0.0094*** 10.49
SalesGrth + 0.1130 0.42 0.0848 0.25 0.0753 0.18
Directorships + 0.1243*** 13.11 0.1465*** 18.91 0.0850*** 6.81
DT ) )0.1013* 2.76 0.0162 0.07 0.1257** 4.63
TotRisk ) )0.5675*** 49.26 )0.4559*** 32.49 )0.2805*** 12.06
Q + 0.0324 2.32 0.0516** 5.91 0.0017 0.00
Ret + 0.0963 0.12 )0.0129 0.00 1.4378 0.06
Vwretd + 1.0305 0.83 0.7503 0.45 1.4378 1.46
IndFpct + 1.1930*** 48.58 0.9063*** 29.66 0.4713*** 8.38
Years included included included
Pseudo R2 0.24 0.24 0.20
LR Statistic 586.3258 599.89 493.81
p-value <0.0001 <0.0001 <.0001
N 3132 3132 3132
Notes:
Industries based on Fama and French’s 1997 48 industry groups are controlled for but are not
reported.
The predicted signs are based on Hillman et al. 2007. ‘‘?’’ denotes that we do not expect a definitive
positive or negative relationship.
First-stage analysis
Table 5 provides the results of the models to predict female directors, female nonexecutive
directors, and female audit committee members.
The model is significant with a likelihood ratio of 586 (599,493) and pseudo R2 statis-
tic of 0.24 (0.24, 0.20) for the prediction model for FDir(FNED, FAud). Consistent with
our expectation, Size, FirmAge, Directorships, and IndFPct have significant positive
coefficients. TotRisk has negative and significant coefficients, and DT is significant for the
presence of female directors and female audit committee members but not for the presence
of female nonexecutive directors. ROA is negative,24 which suggests that firms with better
accounting performance are under less pressure to appoint female directors.25
24. The average ROA of a firm in the sample is about 4 percent. The results indicate that an increase from 4
percent to 5 percent reduces the likelihood of the firm switching from an all-male board to including a
female director reduces by 0.8 percent.
25. Using a change specification is another way to mitigate endogeneity concerns. The model and the results
are discussed in the ‘‘Additional Tests’’ section.

TABLE 6
Association between female board participation and the accruals estimation error
AEE ¼ h0 þ h1 FP þ h2 DirTen þ h3 CEOPower þ h4 DLoss þ h5 LnMVE þ h6 STDðSalesÞ
þ h7 AvgjDWcj þ h8 AvgðOpCycleÞ þ h9 CGboard þ h10 ^
k þ R h11k Yearsk þ e:
k
FP = Pred. sign FDira FNEDa FAud a
Intercept ? 0.0244*** 0.0241*** 0.0219***

5.75 5.66 5.07
FP ) )0.0242*** )0.0236*** )0.0202***
)4.82 )4.90 )4.50
DirTen ) )0.0004** )0.0004** )0.0004***
)2.58 )2.53 )2.67
CEOPower + )0.0049 )0.0050 )0.0052
)1.48 )1.49 )1.57
DLoss + 0.0129*** 0.0129*** 0.0131***
5.24 5.21 5.33
LnMVE + 0.0017*** 0.0017*** 0.0018***
2.69 2.67 2.62
StdSales + )0.0006 )0.0008 )0.0007
)0.26 )0.33 )0.32
Avg|DWC| + 0.1156*** 0.1150*** 0.1168***
6.35 6.30 6.40
AvgOC + 0.0000*** 0.0000*** 0.0000****
CGBoard ) 0.0000 )0.0001 0.0001
0.12 )0.20 0.16
^
k ? 0.0166*** 0.0158*** 0.0129***
4.96 5.02 5.29
Years included included included
Industries included included included
Adj. R2 0.1164 0.1156 0.1155
F-Value 21.4046 21.2579 21.2335
ProbF <0.0001 <0.0001 <0.0001
N 2480 2480 2480
Notes:
a
Heckman corrected t-statistics are reported in parenthesis below the coefficient.
b
White corrected t-statistics are reported in parenthesis below the coefficient.
Industries based on Fama and French’s 1997 48 industry groups are included as control variables
but are not reported.
Second-stage analysis
Accruals quality tests
Table 6 presents the estimation results for (3) with AEE as the dependent variable and the
female directorship variables as the independent variables.

All the FP variables show significant and negative associations with AEE. These results
provide evidence in support of positive association between female directorship and accruals
quality. Consistent with our expectations, DirTen shows a significant negative association
that suggests that a long tenure helps in improving the accruals quality. CEOPower is not sig-
nificant. DLoss shows negative and significant coefficients which suggest that managers in
loss-making firms have less discretion in their accrual estimates. LnMVE has a positive
coefficient that could be because larger firms exhibit more conservatism and defer the recog-
nition of gains through accruals. CGBoard does not show a significant relationship. The
Inverse Mills ratio is significant in all the regressions signifying the effect of endogeneity.
Earnings benchmark tests

The first three columns of Table 7 give the results of the second-stage regression where
INCREASE is the dependent variable and the last three columns give the results when
SURPRISE is the dependent variable. The coefficients for all FP variables are significantly
negative in the respective regressions, providing evidence of a negative association between
female participation in boards and the tendency of managers to increase earnings when
they are just shy of the benchmarks.26 DirTen is not significant. CEOPower is significantly
positive when the benchmark is the previous earnings but not significant when the
benchmark is the analyst forecast. MVBV has a significant positive coefficient. Consistent
with the findings of Ashbaugh et al. 2003, LnMVE has a positive coefficient and DLoss has
a negative one. The inverse Mills ratio is significant indicating the effect of endogeneity.
Correction for within-firm autocorrelation of the error term

Table 8 provides the results when serial correlation bias is corrected by including the
lagged dependent variable as a control variable (Wooldridge 2002, Sec. 13.8.1: 405). The
results show the associations between FP variables and AEE in panel A, and benchmark
variables in panel B. The coefficients for all three FP variables are negative and significant
in panel A and for the SURPRISE variable in panel B. For the INCREASE variable, the
coefficients for FDir and FNED variables are negative and marginally significant, but the
coefficient for the FAud variable is not significant although it is negative. The negative
coefficients for FP show that, after correcting for within-firm serial correlation, female
board participation is significantly associated with better earnings quality.
Controlling for the audit committee and financial expertise

The audit committee is typically responsible for providing oversight on financial reporting
and auditing. Several papers have found evidence that the characteristics of audit commit-
tee affect earnings management (Chtourou, Bédard, and Courteau 2001; Carcello et al.
2006). We add audit committee size as an additional control variable in the regressions
and repeat all the regressions. The first two columns of Table 9 give the results on the
coefficients of FP variables with audit committee size as an additional control variable. It
is seen that all FP variables continue to be significantly negatively associated with the
accruals estimation error and benchmark measures. We also perform these tests with both
audit committee size and financial expertise (denoted by the number of designated finan-
cial experts on the audit committee).27 The last three columns give the coefficients for FP,
26. We also obtain similar results when the change in net income scaled by MVE(t ) 1) is within the interval (0, 0.02).
27. The data on designated financial experts on the audit committee are available only from 2004 to 2007. We
identify the financial experts during 2004–2007 for each firm and count them if they are in the audit com-
mittee of the firm during the period 2001–2003. This procedure could understate the number of financial
experts during 2001–2003. In effect, this understatement is likely to act against our finding significant
results. We also conducted these tests with the data from 2004–2007. The results are similar but less signif-
icant when the sample sizes are small.

TABLE 7
Association between female board participation and small earnings increase and earnings surprise
Pr½BENCHMARK ¼ 1 ¼ L½h0 þ h1 FP þ h2 DirTen þ h3 NEDProp þ h4 NumMtgs þ h5 CEOPower
þ h6 MVBV þ h7 Litigation þ h8 LnMVE þ h9 DLoss þ h10 PDCA þ h11 ^
k
þ R h12k Yearsk þ R h13l INDl
k l
BENCHMARK = INCREASE BENCHMARK = SURPRISE

Pred.
FP = sign FDir FNED FAud FDir FNED FAud
Intercept ? )1.9104*** )1.9315*** )1.9920*** )2.6633*** )2.6681*** )2.7533***

22.16 22.61 23.75 32.96 33.02 34.43
FP ) )0.5788** )0.5308** )0.4123* )0.9984*** )0.9728*** )0.6949***
4.90 4.28 3.20 14.85 14.63 9.14
DirTen ) 0.0075 0.0080 0.0064 0.0108 0.0107 0.0098
0.92 1.01 0.66 1.89 1.86 1.58
CEOPower + 0.3514** 0.3441** 0.3309** 0.1656 0.1678 0.1613
6.21 5.95 5.53 1.42 1.46 1.34
MVBVa +(?) 0.0148** 0.0149** 0.0148** 0.0210*** 0.0211*** 0.0208***
6.34 6.43 6.36 9.79 9.83 9.55
Litigation ) )0.2520* )0.2440* )0.2561* )0.2307 )0.2282 )0.2004
2.97 2.79 3.10 2.68 2.61 2.02
LnMVE + 0.2007*** 0.1976*** 0.1936*** 0.2575*** 0.2567*** 0.2493***
38.69 37.73 33.78 63.29 63.35 55.83
DLoss ) )0.9494*** )0.9508*** )0.9434*** )0.9996*** )0.9974*** )0.9948***
CGBoard ) )0.0235 )0.0290 )0.0204 )0.0095 )0.0109 )0.0181
1.14 1.68 0.87 0.19 0.24 0.70
^
k ? 0.4391*** 0.4084*** 0.2494* 0.5626*** 0.5633*** 0.4512***
7.69 7.11 3.80 12.96 13.86 12.44
Years included included included included included included
Industries included included included included included included
Pseudo R2 0.1461 0.1460 0.1429 0.1783 0.1781 0.1782
LR Statistics 305.1132 305.0102 298.2729 389.4395 389.0623 389.1413
p-value <0.0001 <0.0001 <0.0001 <0.0001 <0.0001 <0.0001
N 3132 3132 3132 3132 3132 3132
Notes:
Chi-square values are reported.
a
We expect a positive association with INCREASE but do not have a specific expectation for
SURPRISE.
Industries based on Fama and French’s 1997 48 industry groups are included as control variables
but are not reported.
ACSize and FinExp in the regressions. It is seen that FP is negatively associated with both
the AEE and Benchmark measures after controlling for the audit committee size and
financial expertise in the audit committee.

TABLE 8
Serial correlation correction
Dependent variable FP variables

FDir FNED FAud
Panel A: Accruals estimation error (N = 2385)
AEE ¼ h0 þ h1 GD þ h2 DirTen þ h3 NegProp þ h4 NumMtgs þ h5 CEOPower þ h6 DLoss þ h7 LnMVE

þ h8 StdSales þ h9 AvgjDWCj þ h10 AvgOC þ h11 AEEt1 þ h12 ^
k þ R h13k Yearsk þ e
k
AEEb )0.0200*** )0.0195*** )0.0172***

)3.98 )4.04 )3.83
Panel B: Benchmark analysis (N = 3132)
Pr½BENCHMARK ¼ 1 ¼ L½h0 þ h1 GD þ h2 DirTen þ h3 NEDProp þ h4 NumMtgs þ h5 CEOPower

þ h6 MVBV þ h7 Litigation þ h8 LnMVE þ h9 DLoss þ h10 PDCA
þ h11 BENCHMARKt1 þ h12 k ^ þ R h14l INDl
l
INCREASEa )0.5017* )0.4679* )0.3145

3.53 3.20 1.78
SURPRISEa )0.9115*** )0.8915*** )0.5846**
12.19 12.11 6.27
Notes:
a
b
Heckman corrected t-statistics are reported in parentheses below the coefficient.
***, **, and *: statistically significant at the 0.01, 0.05, and 0.1 levels (two-tailed), respectively.
‘‘Tokenism’’ and nonlinear relationship between FP and earnings management

Some studies argue that female directors are chosen by firms as mere tokens to satisfy
social pressure or the perception of inclusion (Branson 2006; Bourez 2005). In our sam-
ple, 41.34 percent of firms have one female director whereas only 20.8 percent have two
or more female directors. Thus ‘‘tokenism’’ can be viewed as potentially introducing a
nonlinear relationship between FP and earnings management. To address this issue, we
replicate both stages of our analysis with FP defined as an indicator variable for two,
three, or four female directors on the board. The results of this analysis are given in
Table 10. Panel A gives the coefficients of FP variable in regressions (3) and (4) where
the FP variables are defined as indicators of boards having two or three or four female
directors and take the value of zero otherwise (e.g., if FD3 = 1, the board has three or
more female directors and all boards with zero, one, or two female directors are denoted
by FD3 = 0). Panel B gives the coefficients of FP variable in regressions (3) and (4)
where the FP variables are defined as indicators of boards having two or three or four
female directors and take the value of zero only if there are no female directors (e.g., if
FD3 = 1, the board has three or more female directors and FD3 = 0 denotes all boards
with no female directors. Boards with one or two female directors are dropped for this
analysis). The results in both panels support the argument that the association between

TABLE 9
Association between audit committee membership and financial expertise with earnings qualitya
Regression on the sample from 2001 to Regression on the sample from 2001 to 2007 with ACSize
Earnings quality variables 2007 with ACSize as additional variable and FinExp as additional variables (N = 1401,1675)
Category Variable FP variable FP ACSize FP ACSize FinExp
Accruals quality AEE FDir )0.0229*** ()3.98) )0.0040 ()1.36) )0.0197*** ()2.71) )0.0040 ()1.20) 0.0001 (0.12)
(N = 2,032) FNED )0.0219*** ()4.03) )0.0035 ()1.17) )0.0181*** ()2.70) )0.0035 ()1.04) 0.0000* ()1.92)
FAud )0.0180*** ()3.77) )0.0054* ()1.78) )0.0128** ()2.41) )0.0062* ()1.83) 0.0002 (0.38)
Benchmark INCREASE FDir )0.7260** (6.07) )0.5075*** (9.39) )0.7601** (4.47) )0.4542** (4.69) )0.0475 (1.52)
(N = 2,488) FNED )0.6686** (5.39) )0.5062*** (9.31) )0.6978** (3.86) )0.4575** (4.77) )0.0493 (1.63)
FAud )0.4417* (3.07) )0.5150*** (9.011) )0.6801** (4.95) )0.4546** (4.41) )0.0465 (1.45)
SURPRISE FDir )0.5981** (4.16) 0.0718 (0.19) )0.8455** (5.51) 0.1480 (0.51) )0.0048 (0.02)
FNED )0.5664** (3.93) 0.0666 (0.16) )0.7748** (4.83) 0.1373 (0.44) )0.0055 (0.02)
FAud )0.3036 (1.45) )0.0153 (0.01) )0.4667** (2.31) 0.0652 (0.09) )0.0039 (0.01)
Notes:
a
The regressions are similar to those given in Tables 6 and 7. ACSize is added as control variable in the second stage for the regressions reported in
the first two columns. ACSize and FinExp are added as control variables in the second stage for the regressions reported in the last three columns.
All other control variables are the same as in the corresponding regressions in Tables 6–8.
b
c
Heckman corrected t-statistics are reported in parentheses below the coefficient.
d
White corrected t-statistics are reported in parentheses below the coefficient.
e
FinExp is not directly available in the database for 2001–2003. We identify the financial experts during 2004–2007 for each firm and count them if
they are in the audit committee of the firm during the period 2001–2003. The sample size is 1401 and 1,675 for Accruals Quality and Benchmark,
respectively.
***, **, and *: statistically significant at the 0.01, 0.05, and 0.1 levels (two-tailed), respectively.
ACSize is the natural logarithm of the number of audit committee members on board.
FinExp is the number of financial experts in the audit committee on board.
Industries based on Fama and French’s 1997 48 industry groups are included in the BENCHMARK regressions.

1635
TABLE 10
Test for nonlinearity in the association between female board participation and earnings quality
Panel A: Multiple female directors: Sample split at the number of female directors
Accruals quality (N = 4,284) Benchmark (N = 5,416)
FP variable AEE INCREASE SURPRISE
FD2 )0.02*** )0.47*** )0.81***

FD3 )0.03*** )0.68*** )1.14***
FD4 )0.03 )0.7*** )1.19***
Panel B: Multiple female directors: Sample with multiple directors compared with no female direc-
tors
Accruals quality Benchmark
FP variable AEE FP variable INCREASE SURPRISE
FD2 (N = 2,598) )0.02*** FD2 (N = 3,255) )0.21 )0.76***

FD3 (N = 1,672) )0.01*** FD3 (N = 2,119) )0.02 )1.02***
FD4 (N = 1,454) )0.01 FD4 (N = 1,853) )0.10 )1.33***
Notes:
The coefficient of the FP variable in the regressions shown in Tables 6 and 7 are presented above.
a
FD2, FD3 and FD4 are defined as indicator variables that equal 1 if the number of female
directors on the board is two, three, or four, respectively, and 0 otherwise (e.g., if FD3 = 1,
the board has three or more female directors and all boards with zero, one, or two female
directors are denoted by FD3 = 0).
b
FD2, FD3 and FD4 are defined as indicator variables that take the value of 1 if the number
of female directors on the board is two, three, or four, respectively, and take a value of 0
if the number of female directors on the board is zero (e.g., if FD3 = 1, the board has three
or more female directors and FD3 = 0 denotes all boards with no female directors. Boards
with one or two female directors are dropped for this analysis).
earnings quality and female board participation continues to hold as the number of
female directors increases beyond 1. The samples become small and statistical signifi-
cance is lost for more than four female directors on the board.
Additional tests
Change specification test for endogeneity
We can control for endogeneity using a change specification. We estimated the model:
DAEEt ¼ h0 þ h1 DFDirt1 þ h2 DDirTent1 þ h3 DCEOPowert1 þ h4 DDLosst1
þ h5 DLnMVEt1 þ h6 DSTDðSalesÞt1 þ h7 DAvgjDWCjt1
þ h8 DAvgOCt1 þ h9 DCGboardt1 þ e ð5Þ:
The term DFDir measures the changes in the status of the board from being one without
(with) female participation to one with (without) female participation. There are 218
observations in which the number of female directors had either increased or decreased.
Out of these, there are 34 instances where firms without female directors had included one

or more female directors in their boards and 12 instances where firms with female directors
had changed their status to all-male boards. The range in the change of female directors is
from )3 to +4. The coefficient h1 has a value of )0.0093 with a White-adjusted t-value of
1.51 which makes it significant only at a 13 percent level. Although the sign is consistent
with a decrease of AEE when female board presence is introduced, the small sample
reduces the power of the test.
Measuring earnings quality using return-adjusted discretionary current accruals

Performance-adjusted discretionary current accruals have also been used as inverse mea-
sures of earnings quality. Consistent with prior literature (Becker, DeFond, Jiambalvo,
and Subramanyam 1998; Ashbaugh et al. 2003) we focus on current accruals over which
managers have more discretion in the short run. The nondiscretionary part of current
accruals such as accounts receivable and inventory changes are determined by the scale of
operations of the firm. The remaining part of the accruals not explained by the scale of
operations constitutes discretionary accruals. Discretionary accruals also consist of two
parts. The first part incorporates managers’ private foresight on firm performance (Subr-
amanyam 1996). The second part cannot be explained by the scale or performance of the
firm’s operations, described generally as performance-adjusted discretionary current accru-
als, and is more likely to reflect opportunistic earnings management by managers (Jones
1991; Dechow et al. 1995; Kothari et al. 2005) and can therefore be used as an inverse
measure of earnings quality.
We note that AEE could also be interpreted as performance-adjusted abnormal accru-
als where the scale of operations is measured by sales and investment in property, plant
and equipment and the performance of the firm is measured by current, previous and sub-
sequent cash flows. Kothari et al. (2005) develop an alternative measure of earnings man-
agement where the scale of operations is measured by sales and investment in property,
plant and equipment and the performance is controlled for by including the ROA in the
accruals expectation model. This measure is denoted as return-adjusted discretionary
current accruals (RDCA; Ashbaugh et al. 2003).28
We use an expanded version of the Ashbaugh et al. 2003 model to examine the
association between female board participation and the absolute value of RDCA. In this
model, we control for the board monitoring variables CGBoard and CEOPower. We further
control for growth by the sales growth variable (SalesGrth). Following Ashbaugh et al. 2003,
we control for lagged current accruals (TCAt ) 1), mergers and acquisitions (Mergeracq),
financing, leverage, market-to-book ratio (MVBV), litigation, and cash flow from operations
(CFO). We find that FDir has a negative and significant coefficient, which shows that there is
less opportunistic earnings management in firms with female board participation.
Measuring female board participation by proportions of female directors on the board

We use the proportion of female directors (female nonexecutive directors, female audit
committee members) in the board to measure the extent of female participation. We build
an ordinary least squares model based also on Hillman et al. 2007 to predict the propor-
tions of female participation, and use the predicted values in the second-stage regressions.
We find (untabulated results) that all three predicted proportions are significantly
negatively related to AEE and the benchmark measures, after controlling for CGBoard,
CEOPower, and other control variables that are used in models 3 and 4.
28. Kothari et al. (2005) control for performance using either ROA directly (RDCA) or by matching firms in
the same decile ROA score (performance-adjusted discretionary current accruals). ROA itself depends on
accounting income which might include discretionary accruals. We argue that future cash flow (which is
not affected by earnings management) that is used in AEE is a better control for performance.

Using the component variables of CGBoard as control variables

We estimate (3) and (4) with all the CGBoard component variables as control variables.
The results29 (untabulated) show negative association with FP in all cases. In the model
with AEE as the dependent variable, out of the corporate governance variables, the per-
centage of independent directors and the number of directors on the audit committee exhi-
bit significant negative associations and the number of affiliated directors exhibits
significant positive association for all three regressions where FP = FDir, FNED, or FAud.
The rest of the corporate governance variables are not significant. In the model with bench-
marks as the dependent variables, the total number of board directors, the number of direc-
tors on the audit committee, and the percentage of busy directors all consistently exhibit
significant negative coefficients for all three regressions with the percentages of female direc-
tors, female nonexecutive directors, and female audit committee members.
Benchmark sensitivity tests

Our definitions of the benchmark variables INCREASE and SURPRISE are consistent
with those used in the literature (Ashbaugh et al. 2003). We conduct robustness tests on
smaller deviations from benchmark and obtain similar results. We describe the robustness
test here. Let f+ denote the number of firms in the range of the benchmark (INCREASE
or SURPRISE) = [0, r) where r is the ratio (net income before extraordinary items less
the benchmark ⁄ divided by the market value of equity). Similarly, let f) denote the num-
ber of firms in the range ()r, 0). The expected value of (f+ ) f)) = 0 in the absence of
earnings management. The propensity to meet or beat the benchmark makes the expected
value of (f+ ) f)) > 0, and denotes the extent of earnings management. We estimate the
realized value of (f+ ) f)) for r varying from 0.0005 to 0.0050 in increments of 0.0005 in
both the sample without female board participation (FDir = 0) and that with female
board participation (FDir > 0). We denote (f+ ) f)) = N0 for the sample with FDir = 0
and (f+ ) f)) = Nf for the sample with FDir > 0. We find that (N0 ) Nf) > 0 for all
values of r both for INCREASE and SURPRISE. Stated differently, the extent of earnings
management proxied by the realized difference in the frequency of firms meeting or beat-
ing the benchmark and those just failing to meet the benchmark is consistently higher
among firms without female board participation than those with such participation as we
change the range from a very small range of 0.05 percent to 0.5 percent.30
5. Conclusions
In this paper, we examine the association between female participation on the board of
directors and earnings quality. Female board participation has become a matter of signifi-
cant societal concern as evidenced by two trends: (i) greater female representation on cor-
porate boards in the United States and (ii) several countries legislating minimum levels of
female directorship. Although prior research finds female participation to be associated
with better board monitoring, this is the first study that provides evidence of improved
earnings quality as a tangible consequence of the higher level of monitoring.
Our results indicate that firms with greater female participation on their boards exhibit
higher earnings quality. Earnings quality is an important outcome of good governance
demanded by investors and therefore its improvement constitutes an important objective
of the board. An implication of our study is that the boards can use female participation
to achieve this objective. In conjunction with other studies such as Adams and Ferreira
2009 and Gul et al. 2008, our results suggest that female board participation increases
29. The results are available on request from the authors.

30. The probability of getting this result in all ten ranges if the distribution were symmetric is extremely small.
However, we have not tested whether this result is statistically significant.

earnings quality by improving the oversight function of the board. The overall implication
is that in situations where greater board oversight is desired and better earnings quality is
demanded by investors, inclusion of female directors is a plausible way for the board to
achieve these objectives.31
Our results are consistent for each of the female board participation measures and
robust to several sensitivity tests. However, we might not be able to generalize our results
to other time periods and to other countries that have legislative, regulatory, and cultural
institutions that are different from those in the United States. We also add that while we
have controlled for many board-governance factors, the endogenous nature of board gov-
ernance limits our ability to draw implications on the causal direction. The measurement
of earnings quality is fraught with potential measurement errors. We have tried to mitigate
this concern by using different measures of earnings quality such as accruals quality and
meeting or beating benchmarks. Notwithstanding these limitations, this study represents
an important step in understanding whether the greater participation of females on corpo-
rate boards does, in fact, improve corporate board governance.
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Female Directors and Earnings Quality*

BIN SRINIDHI, City University of Hong Kong

FERDINAND A. GUL, Monash University at Sunway Campus

JUDY TSUI, The Hong Kong Polytechnic University

CAR Vol. 28 No. 5 (Winter 2011)

2. Background and hypothesis

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Benchmark measures: INCREASE and SURPRISE

Controlling for endogeneity — First-stage probit model

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I. Female board participation variables

II. Earnings quality and related variables

(The exhibit is continued on the next page.)

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TotRisk Standard deviation in daily returns over a company’s ﬁscal year

IV. Control variables in the second stage

Factors Component loading Standard error

Anddirpct 0.6085 0.1539

(The exhibit is continued on the next page.)

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Numtotaldir 0.2154 4.7339

V. Additional control variables used in discretionary AEE regression

1 (Largest) 87.7060695 0.6637

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Second-stage models for testing the hypothesis

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Earnings benchmark measures

. In (4), BENCHMARK = either INCREASE or SURPRISE. L[.] denotes the logistic

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4. Empirical analysis and results

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Firm-years with at least

Industry 2001–2007 2001–2007 2001–2007

Food products 10 74 (71) 84

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No female director on At least one female director on the

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(The table is continued on the next page.)

No female director on At least one female director on the

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(The table is continued on the next page.)

CAR Vol. 28 No. 5 (Winter 2011)

FDir FNED FAud

Intercept ? )2.5667*** 171.73 )2.5109*** 171.24 )1.9825*** 114.95

CAR Vol. 28 No. 5 (Winter 2011)

FP = Pred. sign FDira FNEDa FAud a

Intercept ? 0.0244*** 0.0241*** 0.0219***

CAR Vol. 28 No. 5 (Winter 2011)

Earnings benchmark tests

Correction for within-ﬁrm autocorrelation of the error term

Controlling for the audit committee and ﬁnancial expertise

CAR Vol. 28 No. 5 (Winter 2011)

BENCHMARK = INCREASE BENCHMARK = SURPRISE

Intercept ? )1.9104*** )1.9315*** )1.9920*** )2.6633*** )2.6681*** )2.7533***

CAR Vol. 28 No. 5 (Winter 2011)

Dependent variable FP variables

Panel A: Accruals estimation error (N = 2385)

Intercept ? )2.5667* 171.73 )2.5109* 171.24 )1.9825*** 114.95

Intercept ? 0.0244* 0.0241* 0.0219***

Intercept ? )1.9104* )1.9315* )1.9920* )2.6633* )2.6681* )2.7533*

AEEb )0.0200* )0.0195* )0.0172***

FD2 )0.02* )0.47* )0.81***

FD2 (N = 2,598) )0.02* FD2 (N = 3,255) )0.21 )0.76*