Managerial ability has been proven to play an important determinant in tax avoidance, earnings quality, goodwill impairment, and other corporate policies. However, the relationship between investment opportunity and managerial ability has remained unclear for a long time, likely due to difficulty in measurement and other data limitations. This study focuses on how superior managerial ability affects investment opportunity for the following two reasons. First, as a crucial role in corporate finance, investment opportunity impacts a firm’s capital structure, dividend policy, and future growth (Smith and Watts (1992), Kallapur and Trombley (1999)). Second, because investment opportunity is unobservable by outsiders, it would be helpful if we could link investment opportunity to other firm characteristics and managerial ability. We argue that superior managers can understand industrial trends better, predict product demand more accurately, and invest in more value-creating projects, therefore associating themselves with better investment opportunity. Although the hypothesis we propose is somehow intuitive, a recent study in behavior corporate finance also shows that managers with a good reputation and compensation package may engage in more risk-averse and time preference projects that can harm investment opportunities (Graham, Campbell, and Manju (2013)). Moreover, we aim to find out whether the relation between managerial ability and investment opportunity varies under different financial conditions and economic environments. Rather than extrapolate the ability from managers’ characteristics, education background, personality traits, and working experience, we examine the relation by adopting the newly developed measure of managerial ability introduced by Demerjian, Lev, and McVay (2012) – namely, the MAscore (henceforth, we use MA-score to represent managerial ability). This measure follows a two-step procedure composed of data envelopment analysis and multivariate regression to quantify managers’ ef- ficiency in generating revenue. Prior research shows that the MA-score can reflect management-specific factors more precisely through several valid tests and is thus a better measure of managerial ability. The empirical evidence strongly supports our hypothesis, because our results document a significantly positive relation between managerial ability and investment opportunity, even after we control for firm fixed effects, year fixed effects, and other control variables. The empirical results indicate that managers with superior ability are related to more outstanding investment opportunities, as expected. In addition, we conduct a subsample test to look at how managerial ability’s impact on investment opportunity operates in different fi- nancial conditions and find that the result is more pronounced for firms with a low Kaplan-Zingales Index and a high Altman Z-score. Lastly, we interact the MA-score with the HHI dummy and Recession dummy to examine theirs correlations under different industrial and economic conditions and show that superior ability can mitigate the adverse effect of industry competition and financial crisis. For robustness, we conduct many different tests. First, we adopt Tobin’s q and the capital expenditure rate as alternative proxies for investment opportunity. Second, we use another methodology, first difference, to confirm the baseline regression. Third, we select the subsample of positive MAscores to re-run analysis. Fourth, we use 2SLS with instrumental variables, system simultaneous equations model (SEM), and Granger Causality to solve the endogenous problem.1 All results are still consistent with our expectation.

چکیده

این مطالعه این امر را بررسی می کند که آیا شرکت هایی که تحت نظر مدیران برتر فعالیت می کنند، می توانند با استفاده از داده های شرکت های صنعتی آمریکا در طی سال های 1988 تا 2015 به فرصت های سرمایه گذاری مطلوبتر دست پیدا کنند یا خیر. نتایج تجربی نشان می دهد که رابطه مثبتی بین توانایی مدیریتی و فرصت سرمایه گذاری وجود دارد و همچنین این رابطه تنها در شرکت هایی که از لحاظ مالی غیر محدود هستند یا شرکت هایی که در موقعیت مالی قوی قرار دارند معنادار می باشد. در کل یافته های ما از این حمایت می کند که شرکت هایی که مدیرانی با توانایی برتر دارند می توانند به منافع اقتصادی بیشتر از طریق فرصت های سرمایه گذاری بهتر دست پیدا کنند. از طریق تحقیق ما، سیاست گذاران و سرمایه گذاران می توانند توجه بیشتری به توانایی مدیریتی بنمایند.

1- مقدمه

توانایی مدیریتی اثبات کرده است که یک عامل تعیین کننده مهم در اجتناب از مالیات، کیفیت درآمد، و سایر سیاست های شرکت می باشد. با این حال رابطه بین فرصت سرمایه گذاری و توانایی مدیریتی برای مدت زمان زیادی نامعین مانده است که این به دلیل دشواری اندازه گیری و سایر محدودیت های داده ای می باشد. این مطالعه بر روی چگونگی تأثیرگذاری توانایی مدیران برتر بر فرصت های سرمایه گذاری به دو دلیل زیر تمرکز می کند. اولاً فرصت سرمایه گذاری بعنوان یک نقش حیاتی در امور مالی شرکت بر ساختار سرمایه ای شرکت، سیاست های سود سهام و رشد آینده تأثیر می گذارد. دوماً از آنجا که فرصت سرمایه گذاری توسط افراد خارجی قابل رویت نیست، اگر ما بتوانیم فرصت سرمایه گذاری را به سایر ویژگی های شرکت و توانایی مدیریتی مرتبط کنیم نتیجه مطلوبی خواهیم گرفت.

Theory suggests that the extent of corporate hedging by managers depends upon the risk preferences of the CEO. Risk seeking CEOs take more risk due to the higher payoff of convex compensation contracts (CEO options) while risk-averse managers are more likely to act conservatively due to the linear payoff of the equity-like (i.e., CEO equity share compensation, CEO inside debt and CEO cash compensation) compensation contracts (Knopf et al. 2002; Smith and Stulz, 1985, Tufano, 1996). On the other hand, Smith and Stulz (1985), argue that derivatives usage is motivated by growth opportunities, reduction in expected taxes or for reducing the probability of financial distress. Despite the large literature on hedging, previous empirical evidence on these hedging explanations has been mixed.1 The inconsistency in the empirical literature about the forces behind corporate hedging could be attributed to several reasons that motivate this study. First, most of the previous studies on the relation between derivatives hedging and managerial compensation, controlling for firm characteristics, perform cross-sectional analyses relying on just one year of data (Knopf et al. 2002; Tufano, 1996). Using a hand collected unique dataset that spans a 5-year period from 2008-2012 period, a comprehensive investigation is conducted on the relation between hedging and managerial risk preferences. This approach permits to draw inferences about the role of managerial risk preferences and hedging over a five-year period rather than relying on 1 year of data. Second, unlike previous studies that have mainly focused on currency hedging, in this paper both currency and non-currency (interest rate and commodity) corporate hedging activities are analyzed since non-FX derivatives constitute more than 50% (see Table 2) of total derivatives used by our sampled firms. Focusing on all derivatives used (foreign exchange, interest rate and commodity) permits to overcome the selection bias likely to be present in studies that focus exclusively on a subset of derivatives used by corporations. Moreover, the exclusion of a subset can influence the statistical significance of the empirical tests or produce distorted results. Third, different from most previous studies that attribute hedging to a number of different factors, in this study, besides the role of managerial risk preferences, managerial past experiences and education are examined as potential influences on corporate hedging decisions.2 One of the main contributions of this paper is that it examines whether CEO characteristics (i.e., risk preferences, education, age, past experiences, and sex) affect hedging decisions after controlling for managerial compensation and firm level characteristics. Since it is the CEO who makes the final decision to hedge or not to hedge, his personal characteristics and past experiences/education may exert considerable influence on corporate hedging. The “Upper Echelon theory” of Hambrick and Mason (1984), which states that firm outcomes can be partially predicted by managerial characteristics, past experiences and values, supports this notion.

The abundant literature in recent years on the effect of gender diversity on corporate performance is not conclusive. Some studies find a positive (Campbell and Minguez-Vera, 2008; Terjesen et al., 2016, Liu et al., 2014), whereas others report a negative (Adams and Ferreira, 2009) or even non-existent (Carter et al., 2010) relationship between gender diversity and performance. In a meta-analysis of 140 articles studying the impact of gender diversity on corporate performance, Post and Byron (2015) report weaker relationship in lower shareholder protection environments. They argue that in countries with poor shareholder protection, board members have fewer incentives to monitor managers efficiently and to draw on their experience and skills in their advisory/decision-making missions. Similarly, Garcìa-Meca et al. (2015) report that gender diversity has less influence on international bank performances in environments characterized by lower investor protection. Furthermore, the potential impact of gender diversity on performance is sensitive to the company’s characteristics (Anderson et al., 2011) and different mediating variables (Miller and Triana, 2009). Johnson et al. (2013) propose the attributes of female directors as mediating variables. They argue that female directors’ attributes (experience, skills, and demographic characteristics) contribute to enhancing the effectiveness of the board’s monitoring, decision-making, and advisory processes. This paper investigates the relationship between gender diversity and corporate performance using a large sample of French companies. As in some European countries, the civil law system in France offers less protection to minority shareholders (La Porta et al., 2008). Hence, we comprehensively analyze the relationship between gender diversity and corporate performance in a particular environment. Additionally, we enter the black box of the association between gender diversity and performance by analyzing how the attributes of female directors might play mediating roles. Therefore, our research questions are: (1) Does the mere presence of female directors affect firm performance in a weak shareholder protection environment? (2) How do the attributes of female directors affect firm performance? By answering the second question, we can understand the channel through which gender diversity in the board can influence the decision-making and monitoring effectiveness of the board and consequently firm performance.

Earnings management is generally defined as the practice of using discretionary accounting methods to attain desired levels of reported earnings (Gavious, Segev, & Yosef, 2012). Earnings management includes choosing accounting methods which provide reporting income that is advantageous for managers and the company but detrimental for external stakeholders (Krishnan & Parsons, 2008). The issue of earnings quality is discussed extensively in the accounting literature, and is an important area of concern for stakeholders. Earnings quality shows the extent to which stated earnings reveal an organization’s financial situation to interested parties. If users of financial data are “misled” by the level of reported income, then investors’ allocation of resources may be inappropriate when based on the financial statements provided by management (Healy & Wahlen, 1999). Managers are professionally responsible and ethically obliged to make sure that concerned parties receive high quality earnings reports in a timely manner (Krishnan & Parsons, 2008). Following the uncovering of major accounting scams involving large organizations (e.g. Enron), scholars have focussed on managers’ motives for engaging in earnings management (Gavious et al., 2012). The literature mentions various factors, for example, debt covenants, pending litigation and the existence of performance-based compensation plans for management, that can motivate earnings management (Jones, 1991). All stakeholders and users of financial information require tools that can moderate managers’ tendency to engage in earnings management (Krishnan & Parsons, 2008). Several researchers have explored the impact of gender diversity on both financial reporting quality and earnings management (Arun, Almahrog, & Aribi, 2015; Gavious et al., 2012; Krishnan & Parsons, 2008; Labelle, Gargouri, & Francoeur, 2010; Peni & Vah€ € amaa, 2010; Srinidhi, Gul, & Tsui, 2011). However, this issue requires further investigation. Equivocal methodologies and inconsistent findings have left researchers and managers perplexed. The main cause of this uncertainty is the excessive use of the agency hypothesis, which states that statutory diversity alone is enough to control management and provide motives to defend shareholders’ interests (Fama & Jensen, 1983). Prior studies have also focused on the number or percentage of female directors in examining the relationship between board gender diversity and earnings management. Our study broadens this approach and extends beyond research on gender difference by exploring the channel through which female directors exert influence on earnings management. Following the approach proposed by Ben-Amar, Francoeur, Hafsi, and Labelle (2013), we consider both statutory and demographic attributes of female board members. Statutory diversity is a measure of heterogeneity in the process of board composition and is essential for effective monitoring of management (Fama & Jensen, 1983). Demographic diversity (e.g. education, skills and experience) leads to better decision-making by nurturing candidness and analytical decision-making among board members (Erhardt, Werbel, & Shrader, 2003). Our initial sample consists of companies belonging to the CAC All-Shares index listed on Euronext Paris over the period 2001e2010, during which time women were appointed to boards on voluntary basis. Our sample period ends prior the amendment of the gender quota law by the French parliament in 2011. This legislation requires that, as from 2014, 20% of a firm’s board members be women, rising to 40% as from 2016. Apart from the benefits of setting gender quotas, our study highlights the importance of female directors’ attributes, as a consequence of which they are more effective in monitoring the corporate financial accounting process. In our paper, both gender diversity and the attributes of female directors are endogenously determined. We then employ a carefully formulated methodology for dealing with firm level differences, omitted variables, self-selection bias and endogeneity issues. We use propensity score-matching to match gender-diverse firms and non-gender-diverse firms with very similar characteristics. The analysis serves to determine whether sample firms differ in firm-specific characteristics, regardless of the role of gender diversity. We apply the system GMM regression estimation approach to the matched sample to correct for endogeneity bias.