Abstract

Existing literature shows that female-led companies exhibit lower leverage compared to their male-led counterparts, a trend frequently attributed to the traditional view of higher risk aversion among women. We explore firms with female CFOs at or close to their optimal leverage and find that their capital structure is no different than that of firms with male CFOs. We argue that female CFOs reveal their true preferences and risk appetite during significant capital structure adjustments and find that their tolerance for risk aligns closely with that of their male counterparts. Our study challenges the conventional narrative by demonstrating that the financing decisions of top executives are likely not influenced by gender-based psychological differences.

Introduction

Extensive literature builds upon upper echelons theory ( Hambrick and Mason, 1984 ) and relates various executive traits, such as gender, ethnicity, age, R&D background, and legal and financial expertise, to corporate policies and outcomes ( Custódio and Metzger, 2014 ; Serfling, 2014 ; Cline and Yore, 2016 ; Doan and Iskandar-Datta, 2021 ; Li and Xiang, 2022 ; Huang et al., 2023 ; Liao, Ouyang, and Tang, 2023 ; among others). The evidence suggests that the identity of the people at the helm of the company plays a role in shaping firm strategies, including the choice of capital structure. 1 One factor that has been advanced as contributing to the link between executive identity and leverage is the varying degrees of risk aversion that firm leaders might have.

Numerous studies in business and psychology show that gender is related to risk preferences, with females exhibiting higher levels of risk aversion, and lower overconfidence and competitiveness than males ( Barber and Odean, 2001 ; Croson and Gneezy, 2009 ; Bertrand, 2011 ; Charness and Gneezy, 2012 ; Chen, Leung, Song, and Goergen, 2019 ; Wang and Fung, 2022 ; Perrin, Bertrand, and Klein, 2023 ). Within the corporate finance field, extant literature finds evidence that the gender of the members of the top management team affects the capital structure of the firm. Female CEOs and CFOs are associated with lower leverage and less debt issuance ( Huang and Kisgen, 2013 ; Faccio, Marchica and Mura, 2016 ; Schopohl, Urquhart, and Zhang, 2021 ), shorter debt maturity ( Datta, Doan, and Toscano, 2021 ), higher cash holdings and lower cash flow volatility ( Elsaid and Ursel, 2011 ).

Conclusion

Our investigation into the capital structure decisions of firms led by female CFOs during leverage rebalancing events presents compelling evidence that challenges the conventional narrative linking gender to risk aversion in corporate finance. Our analysis reveals no significant gender-based differences in the optimal leverage ratios set by CFOs. This finding calls for a reevaluation of the impact of executive gender on corporate financial strategies, suggesting that factors beyond gender stereotypes are at play in shaping these decisions.

Like most studies in empirical corporate finance, we acknowledge that we can never fully address endogeneity concerns in the absence of a natural experiment despite employing several empirical strategies designed to address omitted variable bias and reverse causality. We do point out, however, that if there is an omitted factor that simultaneously influences the likelihood of having female CFOs and the level of leverage, then for this factor to account for our findings, it should have a differential effect across the year immediately before and the year of rebalancing.