Abstract
India has been endeavouring to achieve gender equality, but has failed to attain much success in the corporate sector. The male-dominated Indian corporate board clearly exhibits gender discrimination. The much-awaited move has finally come from the Indian legislators who took an audacious step towards gender egalitarianism by mandating women directors in Indian boardrooms with the advent of New Companies Act, 2013. The scenario of women involvement on Indian boards just prior to this enactment has been appraised through this study. A glimpse on the advantages accruing to the companies permitting women-led initial public offering (IPO) is explored. The impact of the presence of women directors on IPO underpricing is examined by analyzing 230 Indian companies that went public from 1 May 2007 to 31 March 2013. It was found that more than 50 per cent of the sample companies lack gender diversity and in fact employ no women directors in their boards. The results point towards the existence of women on Indian boards as mere token who fail to impede IPO underpricing. The implication for the managers of Indian companies is to pursue the global trend of female inclusion and appraise women on Indian boards from mere tokens to form a critical mass to procure the benefits of gender diversity.
Introduction
Whenever the vehicle of initial public offering (IPO) is trodden in the market, it carries along with it information asymmetry, pricing issues, subscription fears, susceptible vendors and quality issues. The fog around an IPO needs to be cleared so that it becomes clearly visible to the public, who can subscribe for it at an appropriate price. Gone are the days when only the financial aspects of the company were evaluated to make an investment decision. Today the non-financial signals are given a substantial value while making an investment choice, as is evident from the growing relevance of intangibles in determining the competitive advantage of the issuer company (Schwaiger, 2004).
Companies, who approach the capital market for the first time by floating an IPO, lack past track record and are unknown to the public. So they need to demonstrate their quality by sending signals and for this many certification mechanisms are adopted including underwriter reputation (Carter, Dark & Singh, 1998), presence of venture capitalists (Megginson & Weiss, 1991), quality of board of directors (Certo, Daily & Dalton, 2001) and credit rating among others (Jacob & Aggarwalla, 2012). Similarly, having women on the board also enhances the reputation of the company which signals high level of corporate governance (Brammer, Millington & Pavelin, 2009).
Since the most crucial event in the life of a company is going public, the board must signal superior quality at this occasion. Burke (2003) recommends inclusion of female directors to form an appropriate board at the time of IPO. As per the ‘signalling theory’ given by Certo (2003), gender diversity on the board can be considered as a signal of a company’s quality at the time of IPO. Gender diversity ensures understanding of diverse stakeholders by the issuer company and helps gain legitimacy among the naive investors. Hence, Certo (2003) argues inclusion of both males and females on the board of company launching fresh issue. The ‘resource dependency theory’ (Pfeffer & Salancik, 2003) posits a firm achieves high levels of success if it possesses resources different from other competing firms. Hence, possession of female directors on the board is acclaimed to produce positive tangible outcomes for the employing firm. As women directors are more autonomous, participative, supportive, collaborative, less hierarchical, enable productive discussion and are more risk-averse, their presence facilitates superior decisions (Bilimoria, 2000).
Women possess deep insights of consumer markets, especially knowledge of female market segment (Daily, Certo & Dalton, 1999), and help people, while men aim at making money (Betz, O’Connell & Shepard, 1989). They do not get involved in unethical behaviour to prosper, appreciate group effort as well as exhibit social and community concern, hence making the company competitively stronger (Bilimoria, 2000; Burke, 1997, 2003; Stephenson, 2004). Hence, it is an enviable business practice to have female directors as it enhances the reputation and gives a strategic direction to the company (Bilimoria, 2000). Even Welboune (1999) noticed IPOs having women at the top management team depicted strong fundamentals, which yielded better financial results in the long run.
Despite the above-stated benefits accruing to the firm employing women on the board, there are many reasons for the non-visibility of a critical mass of women on the board. Women lack experience which serves as an obstacle in their growth (Barber & Odean, 2001). An urge to include women on a company’s board from mere tokenism to critical mass, which enhances firm innovation and performance substantially as empirically evidenced by Torchio, Calabro and Huse (2011), can only be adhered to if the legislature steps in and makes a move in this direction like that of the Norwegian, Malaysian and Swedish legislatures which mandate 40, 30 and 25 per cent female representation on boards, respectively.
The aim of the current study is to test the signalling effect of women directors in the context of IPOs, that is, whether females signal quality and investors perceive them favourably so much so as to leave an impact in reducing the short-run underpricing. Hence, the purpose is to empirically test the role of women directors in lowering IPO underpricing in a fast-growing economy like India.
Literature Review and Hypothesis Development
Board diversity can be publicized through demographic, racial or gender variations. There exist two lines of thought on the functioning of diverse boards––one that claims that more diverse boards inculcate diverse thinking and better ideas which may ultimately result in quality decisions by corporate boards (Hillman, Shropshire & Cannella, 2007). Superior quality of decisions can emerge from a pool of diverse ideas from where the best is chosen. However, the other line of thought portrays more chaos, lack of cohesion and more conflicting views among board members with paradoxical thinking (Jehn, Northcraft & Neale, 1999). Although there exist numerous studies probing the issue of diversity and revealing different arrays of relations it renders on the financial variables of a body corporate, the arena of gender diversity is relatively a new one which has come to the limelight in the recent years and has caught the attention with mounting women empowerment globally.
Gender equality has caught the attention of policymakers so much so that legislators have made women representation mandatory by introducing quotas in nations, such as, Norway, Sweden and Malaysia. The move of gender egalitarianism has become a contemporary issue in corporate governance. The researchers all over the world have been on their toes to stake out the subsistence of women directors and their chore in the performance of companies. Errand of females in the boardroom and financial corollary has emerged as a much sought-after hot topic for discussion by the investigators of financial literature. A brief review of literature on impact of women directors on the financial performance of the companies exhibits lopsided review in developed nations and a small number of examinations in developing nations, such as, Denmark, Nigeria, Spain and India. Most of the studies conducted in the US demonstrate positive impact of gender diversity on the financial performance (Adler, 2001; Catalyst, 2004; Erhardt, Werbel & Shrader, 2003), while Kochan et al. (2003) and Swinney, Runyan and Huddleston (2006) concluded no positive increase in the firm value on appointing women on the board. Most of the non-US studies carried out in nations, such as, Denmark, Norway, Nigeria and Sweden, concluded no significant bearing on financial outcomes of the companies endorsing gender equality on their board (Du Reitz & Henrekson, 2000; Randøy, Oxelheim & Thomsen, 2006; Smith, Smith & Vemer, 2006).
Going public is a momentous event in the life of a company. At this crucial juncture, every company wishes to portray a rosy picture before the public. There always exists information lag between the issuer company and prospective investor. The issuer company in an effort to lower this information asymmetry or information gap existing among public indulges in promulgating quality signals. Among many such signals observed and documented in the literature, presence of women in the boardroom may bestow backing to the IPO. Taking a cue from the firm’s governance mechanisms, such as, board composition, placing women at the forefront to host the IPO campaign can be inferred as a quality signal by the naive investors and assist the issuer a successful breakout from private domain. A glimpse at the literature of gender diversity and underpricing shows a mixed response of investors towards female-led IPOs. Few studies point towards a positive linkage like the study of Costa, Crawford and Jakob (2013), who related the degree of masculinity with higher underpricing as male-led boards indulged in cut-throat competition among themselves and took advantage of others to serve their own personal interests; hence, boards having few or no females were identified as risky investments thereby resulting in higher first-day underpricing. Not only the equity but the bond market also showed that gender diversity plays a crucial role in lowering the cost of public debt in Japan as documented by Tanaka (2014). Kang, Ding and Charoenwong (2010) concluded that investors tend to respond positively to the appointment of female directors on the board of companies in Singapore.
On the contrary, Mohan and Chen (2004) found no significant difference in underpricing with respect to gender. Hence, both male- and female-led IPOs were perceived with equal uncertainty by the investors. Investors while investing in property trust and high-tech IPOs in Australia did not attach any relevance to females on the boards (Dimovski & Brooks, 2005). It was found in a study by Stanley (2002) that the higher the number of females present in the board, the higher is its scrutinization in terms of performance. Hence, the cloud of uncertainty surrounds a female-led IPO with higher intensity (Barber & Odean, 2001; Jianakoplos & Bernasek, 1998; Olsen & Cox, 2001; Sunden & Surette, 1998). To date, hardly any Indian study has explored the impact of women directors on underpricing. Hence, the present study is a modest attempt in this direction to fill this gap.
The current study tries to unearth the relevance of gender diversity in a country idiosyncratic due to family-held corporate boards, low legal protection for investors and low proportion of women occupying responsible positions in business, a situation which the government recently began to address via legislative changes as is evident from mandating of women on corporate boards with the implementation of New Companies Act 2013, but there exists a dearth of literature in the Indian context to fathom the benefits of gender diversity on the first-day listing returns of a company. Much of the research on women participation in Indian boards has been limited to exploring reasons of their low participation or the obstacles that hinder the progress of women to managerial positions, while some have focused on the pattern of women directors in Indian corporate boards (Balasubramanian & Ramaswamy, 2012a, 2012b; Srinivasan & Pallathitta, 2013). Picking up the line of thread from the work of Balasubramanian (2013) who left open the delicate issue of benefits of gender diversity on Indian boards in the light of family-controlled business houses, the current study aims to unravel the possible nuance of underpricing of firms showing women on board seats at the time of IPO.
Resource dependency theory and signalling theory serve as pillars to joist the vital role played by female directors on board seats at the time of IPO. Resource dependence theory posits that the presence of unique resources in a firm enhances its competitive position. The appointment of females on the board can serve as a valuable resource as they possess deep insights of consumer markets, especially knowledge of female market segment (Daily et al., 1999). Female directors practice non-prejudice and their presence ensures fair practices in the organization and they signal the audience the existence of a resource within a firm capable of ruling out any type of erroneous act. The signalling theory, however, holds that appointment of females speaks of gender equality and fairness practiced by the firm, hence adding another feather in the cap along with the other quality signals including underwriter reputation (Carter et al., 1998), standing of auditors and venture capitalists (Megginson & Weiss, 1991) and quality of board of directors (Certo et al., 2001). It is expected for the companies to face lower degree of underpricing divulging gender equality as the presence of female directors acts as a quality signal and a unique resource which caters to the need of multiple stakeholders that enhances the reputation of the company employing them (Brammer et al., 2009). If the prospective investors interpret this clue or quality signal precisely, the level of first-day under performance is anticipated to be low. Consequently, the following hypothesis is framed:
H1: Presence of the females on the board reduces IPO underpricing.
Research Methodology and Data Collection
To meet the objective of the study, data were extracted from IPO prospectuses that are mandatory filings to be submitted to Securities and Exchange Board of India (SEBI, the Indian market regulator) before any Indian company launches an IPO. As the study attempts to examine the impact of women directors (on the board of Indian companies) on first-day listing returns, the database comprises 250 Indian companies that approached the new issue market (NIM) for the first time during the period from 1 May 2007 to 31 March 2013. The sources of data comprise websites of SEBI (
Dependent variable: Since the study intends to capitulate the impact of women directors on underpricing, underpricing is taken as a dependent variable, which is calculated as the first-day closing price minus the offer price divided by the offer price (Certo et al., 2001). The data on the offer price and the first-day closing price were collected from the website of Capital Market.
Independent variables: The impact of female directors on underpricing is examined by introducing a dummy variable which takes the value 1 if at least one female director is present on the board at the time of IPO and 0 otherwise. The data on the number of females on the board of the companies were gathered from the ‘management section’ of the offer document, which was downloaded individually for each issuer company from the official website of SEBI, the Indian regulatory authority, to which each issuer company has to submit the prospectus for scrutiny before going public. If there was any confusion with regard to the gender of the directors, the individual biography of each director was searched to refer to the pronouns (he/she, his/her) to determine the gender of the director.
Control variables: Some control variables have been introduced in the regression model so that the impact of independent variables is clearly noticed. Past studies suggest inclusion of firm size as a control variable, which has been measured by total pre-IPO assets in million rupees, IPO size (a proxy of firm size is measured by the amount in million rupees) raised by the issuer company through IPO and age (as measured by difference in date of incorporation to the issue offer date) which, as supported by literature, are expected to generate a negative impact on underpricing. These variables were normalized by taking their natural logarithm. The above variables were extracted from the prospectus or from the websites of Chittorgarh or Capital Market. Oversubscription (taken from
Empirical Results
Underpricing is a commonly observed phenomenon in the capital markets all over the world (Beatty & Ritter, 1986). Every financial market whether developed or developing bears a scar of underpricing. The statistics of the sample under study also reveal the similar pain undergone by Indian issuers on the day of listing. The descriptive statistics of the sample companies that went public for the first time are reported through Table 1(a). On an average, Indian firms hitting the capital market for the first time experience nearly 14 per cent underpricing. The highest underpriced IPO made the issuer company face a loss to the extent of 225 per cent, in terms of lesser resources pooled in through IPO, due to incorrect IPO pricing. While on the other extreme, some Indian issuers were given an opportunity to drag out more funds from investors’ pocket than justified, as the IPO was overpriced to the level of 32 per cent.
Oversubscription tells how many times the issue was oversubscribed. Oversubscription displays a high degree of cross-sectional variation. Oversubscription ranges from 159.40 to 0.91 times. The average rate of oversubscription was 13.77 pointing towards investors’ lure of earning high returns in spite of high risks involved in corporate investments.
Descriptive Statistics
Listing delay speaks of the delay in listing of the Indian securities post-IPO close date. Normally, the Indian companies are listed on the stock market after 19 days of the offer close date. Issue size variable represents the total amount of funds raised by the issuer company through IPO. The mean value of issue size is ₹5,000 million (approximately), which suggests that large amount of funds are raised by the Indian companies. Age reflects the time gap between the incorporation of the company and its first-time offer to public. Indian companies are found to tap the primary market normally 15 years after their incorporation.
The board characteristics reveal that minimum 4 and maximum 20 directors constitute Indian boards. The average number of members at the board is 8, whereas the number of females out of them ranges from 0 to 3. Of the few women who are able to reach to the board position, encompassing middle-aged graduates, the youngest among them is 26 years old while a senior women working at a board position is 63 years of age. Since a director of a company can hold directorships in other companies as well, the number of outside directorships held by female directors is examined. The number of other directorships possessed by women directors ranges from 0 to 26, which on an average turns out to be 4.
Table 1(b) depicts the trend of female appointment on Indian corporate board. It is discovered that there is a general trend of low recruitment of females on the Indian boards. The maximum number of females appointed on the board is three and that too there is only one company (Tara Jewels Limited) in the sample of 230 companies which has supported female representation from merely being a token to form a critical mass. More than half, that is, 63 per cent, of the Indian companies do not employ females on the board, yet only one female is found in 29 per cent of Indian boards. Ninety-nine per cent of the companies are male dominated, where women are merely numbered as tokens (i.e., less than three) as defined by Torchio et al. (2011).
Number of Women across Indian Corporate Board
Sample Comparison Based on Gender
Table 2 reveals gender differences for initial IPO returns as well as firm characteristics. The average underpricing of female-led IPO is 11.39 per cent, which is approximately 4 per cent less than underpricing experienced by male-led IPOs, that is, 15.22 per cent. The maximum value of underpricing faced by male-dominated companies was 225 per cent, which is more than double the underpricing experienced by female-led companies, that is, 75 per cent. These figures clearly point out towards a need for recruiting female directors on the prestigious occasion of launch of an IPO by a company. But the results are, however, not statistically significant as the t-value reported in the table is 1.03 (p-value 0.31 > 0.05). The firm attributes were not found to be statistically different based on gender.
It is worth mentioning that it takes longer time for the male-led IPOs to get listed on a stock exchange than female-led IPOs. The average delay in commencement of trading of securities of companies not employing any women in the boardroom is 21 days (approximately), whereas that of firms with at least one women director is 17 days. Even the result reports significant differences in listing delay based on gender at 10 per cent level (t-value 1.72, p-value 0.09 < 0.10). It seems astute enough to host a female-led IPO that brings benefits for the IPO rider.
Since the data were highly skewed and depicted high standard deviation, non-parametric test was envisaged to ascertain gender differences in firm attributes. The results, however, remain unchanged as in t-test. A conclusion from the above analysis is that women in the boardroom convey a quality signal to prospective investors so much so as to lower underpricing. However, the results of t-tests reveal insignificant differences between male- and female-led IPOs.
The main objective of this article is to examine the effect of women directors on IPO underpricing. To accomplish this objective, multivariate regression analysis is undertaken taking underpricing as a dependent variable and the number of women directors, IPO-related attributes (such as, oversubscription and listing delay), firm attributes (such as, issue size and company age) and board attributes (such as, total number of board of directors, qualification, age and outside directorships held by female members of the board) as independent variables. Regression results have been procured after complying with all its assumptions. To normalize the variable, natural logarithm of that variable is taken. The pre-IPO asset variable correlated highly (r > 0.80, significant at 1 per cent level) with issue size variable and as such to rectify the multicollinearity problem, the pre-IPO asset variable was dropped from the list, since issue size captured a better relation with underpricing.
Multivariate Regression Analysis Taking Underpricing as Dependent Variable
Table 3 reports the results of regression analysis taking underpricing as a dependent variable and firm and IPO attributes as independent variables in Model 1. The variables regressed explain 45 per cent variation in underpricing. Oversubscription is found to drive underpricing in a positive direction (significant at 1 per cent level), as the higher is the demand for securities, the higher is the level of underpricing (Shah, 1995). A large issue size signifies a larger company to investors, who believe in more safety of their funds in such companies. As such, issue size is expected to generate a negative impact on underpricing (Shah, 1995). Results also confirm this notion as a 1 per cent increase in the amount raised through IPO decreases underpricing by 3 per cent (p-value 0.00 < 0.01). Also stakeholders are more familiar with the prospects of an old and well-established business house and configure more confidence in its ability when compared to a new one. An older company is expected to lower underpricing, but the results, however, illustrate an insignificant positive relation. Similar to the results of Lee, Taylor and Walter (1995), the model shows a negative relation between listing delay and underpricing at 10 per cent level of significance.
The impact of female presence at the time of IPO on underpricing is examined through Model 2, where a dummy variable is introduced, which takes the value 1 if at least one female is present and 0 for no females on the board. As is evidenced by Welbourne (1999), inclusion of women in the board at IPO launch is viewed as a quality signal that lowers uncertainty in the minds of investors about the issuer, reduces information asymmetry problem and hence ultimately diminishes first-day underpricing. The results show a negative relation between women existence on the board and underpricing, dwindling it by 1.8 per cent when women directors inaugurate an IPO whereby inferring that as the number of female on the board increases, the level of IPO underpricing decreases; hence, it can be concluded that Indian investors perceive women directors as a quality signal and consequently, companies recruiting women at board positions are rewarded through diminution of underpricing. However, the results are not statistically significant (p-value is 0.0357 > 0.05). Other variables report similar results as in Model 1 except the inverse relation between listing delay and underpricing turns to be significant at 5 per cent level (earlier 10 per cent level in Model 1).
In Model 3, a slight change is made by introducing the actual number of females at the board instead of a dummy variable (taken in Model 2) for scrutinizing the impact of women directors on underpricing. The results, however, do not change. Even the actual number of female directors present at the time of IPO exhibits a negative but insignificant relation with underpricing.
Examining the impact of board attributes, such as, board size, qualification, age and other directorships held by women directors along with IPO-related variables, is deciphered in Model 4. The number of other directorships held by the female directors of issuer company signals expertise, thereby lowering underpricing and theory supports a negative relation between the two (Filatotchev & Bishop, 2002). The results also indicate a negative but a weak relation. The qualification of female directors lowered underpricing by 3.3 per cent. But since the p-value was 0.111 (>0.05), consequently, higher education possessed by female directors generates a feeble decrease in the level of first-day underpricing indicating good governance from the qualified board. As the total number of directors increases, the company is expected to take quality decisions as there is a wider pool of knowledge and more information sharing among larger number of decision makers. A large board size is estimated to decrease underpricing. But the results are unable to capture such a relation. The other variables report more or less similar results as in Model 1. However, listing delay changes the direction of relation with underpricing which is statistically not significant. The inverse relation between the issue size and underpricing holds, but the significance level changes from 1 per cent to 5 per cent.
Conclusion
The purpose of the study is to explore the benefits of having women on the board at the time of IPO launch, specifically in terms of reduction in first-day trading returns. The results do not support the hypothesis and indicate no impact of the presence of female directors on IPO underpricing, thereby meaning that female directors on the board at the time of IPO fail to act as ‘quality signals’ to reduce underpricing in India. Indian corporate houses send many clues when going public; hence, it may be inferred from the above findings that Indian investors value other signals more. Extending the line of thought offered in the study of Otero (2014), it can be concluded that ‘investors assign more importance to the result of governance of the companies that go public in the capital market and the composition of the board appears to be dispensable while taking investment decision’. Hence, the number of women on the board fails to reduce IPO underpricing. According to Joecks, Pull and Vetter (2013), the benefits of gender diversity cannot be realized until females form a critical mass on the board. Since females fail to form a critical mass on Indian corporate board, they fall short to lower IPO underpricing. The findings of this study confer a motivation to the managers of Indian companies to promptly adhere to the New Companies Act 2013, which mandates women on corporate boards, to form a critical mass on the board, in order to procure the benefits accruing from gender egalitarianism. With the upsurging revolution of women empowerment and a united call for gender equality raised by legislators through the enactments like that of fixing ‘female quotas’ in various set-ups, the time is not far off when the female power would be accepted by one and all.
This study is, however, limited to the extent that the experience of female directors as an important board attribute has not been studied due to unavailability of data for the companies taken in the sample. The results of the study might have been affected by the limited number of females present on the Indian boards. Hence, from now onwards, due to appointment of mandatory women directors on the board of companies, as now legislated by New Companies Act, 2013, companies might incorporate higher number of female directors in future, which might increase the role of women from merely being a token to form a critical mass. The study undertakes to analyze the effect of having women on the board on short-run performance only, whereas future research can undertake both short-run and long-run impacts of gender-diverse boards.