Board Gender Diversity and Firm Risk- Taking: Evidence from Saudi Arabia

In recent years, the issue of gender diversity on corporate boards has gained increasing attention, as studies suggest that diverse boards can improve organizational performance, decision-making, and innovation. Within this context, the relationship between gender diversity on boards and corporate risk-taking has become a major area of research. While much of the discourse surrounding gender diversity focuses on Western contexts, the significance of this issue extends to other regions, including the Middle East. Saudi Arabia, a country traditionally known for its conservative social norms and gender roles, has witnessed significant social and economic transformations in recent years. Under the Vision 2030 initiative, Saudi Arabia is actively working towards modernizing its economy and empowering women in the workforce. This includes increasing the representation of women in leadership roles, including on corporate boards. In 2017, Saudi Arabia’s Capital Market Authority (CMA) introduced regulations mandating that publicly listed companies have at least one female board member [1-6]. This shift represents a significant departure from the past, when gender diversity in corporate leadership was rare. Despite these advancements, questions remain regarding the impact of gender diversity on board decision-making, particularly in terms of risk-taking. Research in other regions has shown that gender-diverse boards may approach risk differently, with female directors often perceived as more risk-averse than their male counterparts. However, cultural, economic, and institutional factors in Saudi Arabia could influence this dynamic in unique ways. Understanding the relationship between board gender diversity and risk-taking behaviors in Saudi firms is crucial for policymakers, investors, and corporate leaders who seek to foster effective governance and sustainable growth in this rapidly evolving market.

This study aims to explore how gender diversity on corporate boards in Saudi Arabia influences risk-taking behavior. In our knowledge, no prior research in Saudi Arabia tried to study thoroughly the impact of gender diversity on risk-taking. The almost lack of research in the present literature about the role of women in corporate boards in Saudi Arabia, makes this work very important in the understanding of the effectiveness of women empowerment and their influence on risk taking in listed Saudi companies. In this paper we provide new relevant evidence to the worldwide debate about the effectiveness of board gender diversity by investigating the hypothesis that women’s participation in corporate boardrooms affect firm risk taking. Our results show that the presence of women in the board of directors is associated with lower risk. The rest of the paper is organized as follows. Section 2 provides the theoretical underpinnings of our research. Section 3 reviews the relevant literature and the driven hypothesis. In section 4, we present the data and the methodology. Section 5 analyzes the results. Finally, section 6 concludes the paper.

Naturally, men and women have different perception of risk, that’s why gender differences lead to different decisions. Contrary to men, women are more sensitive, risk averse, build close relations with their entourage and are inclined to avoid conflicts. These characteristics may lead to less risk-taking behavior in companies. Bruna et al. [7] documented that the risk aversion behavior of women is extreme when they are responsible for making strategic business decisions and they are conservative particularly in making financial investments [8-18]. According to the prospect theory developed by Kahneman & Tversky [19], this theory suggests that individuals are more likely to avoid risks when they perceive potential losses, but they might be more willing to take risks when they are framed as opportunities to avoid losses. Gender differences in risk-taking might arise due to different risk perceptions, with women often perceived as more risk-averse than men. Similarly, the Behavioral Theory of the Firm suggests that firms do not always act rationally due to bounded rationality and organizational biases. Gender diversity on the board may help reduce biases in decisionmaking and promote a more balanced approach to risk, as women may bring caution and long-term thinking that counteracts overly aggressive risk-taking behaviors [20-28].

Nevertheless, some studies documented that once female directors break the glass-ceiling practice, the degree of risk aversion characteristics diminish and female directors act as the male culture. This finding is confirmed by the study of Switzer & Huang [28] who found that female directors can seek more risks compared to their male counterparts. A growing body of research suggests that women generally exhibit lower risk tolerance than men, advocating for more conservative, risk-averse strategies. However, the impact may vary depending on the social and corporate context, such as in conservative cultures like Saudi Arabia. Nevertheless, recent reforms in Saudi Arabia have aimed to increase gender inclusivity, driven by the Vision 2030 plan, which calls for the greater participation of women in the workforce and leadership roles.

A growing body of literature investigates how gender diversity among board members influences corporate decision-making, particularly in the context of risk-taking behavior. Research on the impact of gender diversity on board behavior often investigates how the inclusion of women affects decision-making processes, including risk-taking. Several studies provide insights into this relationship. A common finding is that gender-diverse boards are more risk-averse. Women, on average, are found to exhibit a more cautious approach to decision-making, particularly in contexts involving high uncertainty or significant financial risk. This is often attributed to gender differences in risk preferences or gender roles that emphasize caution. Adams & Ferreira [3] found that firms with a higher proportion of female directors are less likely to take extreme risks and tend to engage in less aggressive investment strategies. Similarly, Chakrabarti et al. [11] found that the gender composition of the board can influence the firm’s strategic risktaking and corporate social responsibility orientation, with women encouraging more conservative and socially responsible practices. Gender-diverse boards may lead to more balanced perspectives, resulting in less aggressive risk-taking. Female board members might focus on long-term stability and sustainability rather than short-term profits. This contrasts with more homogeneous, typically male-dominated boards, which may show a higher propensity for riskier, high-return strategies.

Some studies have examined how gender-diverse boards behave during financial crises. Gender diversity might moderate the negative impacts of financial crises by providing more diverse viewpoints and reducing excessive risk-taking associated with male-dominated decision-making in pre-crisis periods Campbell & Mínguez-Vera [22]. Gender effects on risk-taking may also depend on other board attributes, such as the size of the board, director tenure, or board expertise. For example, women may be more likely to influence decisions in smaller, more cohesive boards, while in larger boards, the effect of gender diversity might be diluted. For Example, Huse & Solberg [18] pointed out that the impact of gender diversity on risk-taking could vary depending on the board’s overall composition, such as board independence and age diversity. Nielsen & Huse [26] and Mohseni et al. [22] found that in countries with stronger gender equality policies, such as in Scandinavia, genderdiverse boards tend to take more moderate risks, while in countries with weaker gender policies, the effect is less pronounced.

Carter DA [8] found that diverse boards may contribute to improved decision-making by reducing overconfidence among board members, which in turn could lead to more risk-conscious governance. Some other studies showed that Gender Diversity and Risk-Taking the presence of women on boards can encourage more innovative risk-taking in certain industries, especially when the board includes highly qualified women who challenge traditional norms and bring new perspectives. In summary, empirical studies generally find that gender-diverse boards are more likely to exhibit lower risk-taking, Given the previous background, we assume that: the presence of women in the board of directors negatively influence the firm risk taking.

In this section, we will first present our sample as well as the variables used in the study. Then, we will introduce our econometric model and the methodology applied.

Sample and variables

The study uses a sample of 148 non-financial firms listed on the Saudi stock exchange from 2018 to 2023. The selection of non-financial firms is likely due to the unique regulatory and risktaking behaviors of financial firms, which could skew the results if included. The time frame (2018-2023) was chosen to capture the period after the implementation of the Capital Market Authority’s (CMA) regulation in 2017, which mandated at least one female board member in publicly listed companies. This period is particularly relevant as it reflects the evolving corporate governance landscape in Saudi Arabia under Vision 2030. One potential bias in the sample selection is the exclusion of financial firms, which may limit the generalizability of the findings to the broader market. Additionally, the study focuses only on publicly listed companies, which may not represent the behavior of private firms or smaller enterprises.

The study employs a panel regression model with fixed effects to analyze the relationship between board gender diversity and firm risk-taking. The fixed effects model is chosen based on the results of the Hausman test, which indicated that the fixed effects model is more appropriate than a random effects model (p-value = 0.002). The fixed effects model controls for unobserved heterogeneity across firms that is constant over time, such as firm culture or industry-specific factors, which could influence risk-taking behavior. The dependent variable is the firm’s risk-taking behavior, measured by the Altman Z-score, which is a widely used metric to predict the likelihood of bankruptcy. The Z-score is calculated using a combination of financial ratios, including working capital, retained earnings, EBIT, market value of equity, and sales, all scaled by total assets.

The independent variable is board gender diversity, measured in three ways:
A. TW (Total number of female directors on the board): This measures the absolute number of women on the board.
B. DW (Dummy variable for the presence of at least one woman on the board): This binary variable captures whether the board has any female representation.
C. RW (Ratio of women to men on the board): This measures the relative proportion of women compared to men on the board.
The study includes three control variables:
a) Firm Size (Size): Measured as the natural logarithm of total assets, firm size is included because larger firms may have different risk profiles compared to smaller firms.
b) Board Meetings (BM): The total number of board meetings held annually is included to control for the level of board activity, which could influence decision-making and risk-taking.
c) Debt-to-Asset Ratio (D/A): This ratio is included to control for the firm’s leverage, as higher leverage may incentivize firms to take on more risk to meet debt obligations (Table 1).

Table 1:Variables.

The econometric model

To assess whether the fixed effects model is appropriate, we conducted a Haussmann test. We found a P value = 0.002 implying that the fixed effect model is the most efficient for this study. The econometric panel model which is used in this study to test the influence of gender diversity on firm risk taking is as follows:

“i” stands for firms and “t” for time.

Descriptive statistics

Table 2 shows the descriptive statistics of the variables of the study. The dependent variable z-score ZS varies from -3.7894 to 23.5120. The mean value is 2.8336 and the standard deviation 1.0654. The board gender diversity is used as an independent variable and it is measured by using three proxies which are: TW, DW and RW. TW is the independent variable which is calculated by means of total number of women in board of director. The minimum value of TW is 0 and maximum value is 3. The mean is 0.3546 and the standard deviation is 0.0397. DW is a dummy variable which takes the value 1 if there is at least 1 woman in the board and 0, otherwise. The mean value of DW is 0.2056 and standard deviation is 0.3466. RW is the ratio of females in the board. Its minimum value in the table is 0 and maximum value is 0.493. The mean value for RW is 0.1822 while the standard deviation is 0.1972.

Table 2:Descriptive Statistics.

The correlation analysis

Table 3 shows that there is a moderate positive correlation (0.2272) between the total number of women on the board TW and the z-score of the firm. This suggests that as the number of women on the board increases, the level of the z-score increases (the insolvency risk decreases), though the relationship is not very strong. This may imply that larger numbers of women on the board could potentially lead to more conservative decisions, although the effect is not very large. Similarly for the variable DW (the existence of at least one woman on the board), there is a moderate positive correlation (0.2571) between the existence of women on the board and risk-taking. This indicates that having at least one woman on the board is associated with lower levels of risk-taking. Again, the positive correlation with the z-score suggests that the presence of women could lead to more cautious or conservative decision-making, though the correlation is not extremely strong. For the ratio of women to men on the board, the correlation with the z-score is very weak and positive (0.0867). This suggests that the gender ratio on the board has little to no significant impact on risk-taking behavior. The relationship is very weak, implying that this particular measure of gender diversity may not be a strong determinant of a firm’s risk profile.

Table 3:Correlation Matrix.

The firm size has a moderate positive correlation (0.3657) with the z-score. This indicates that larger firms tend to take fewer risks. The results show also a very weak positive correlation between the number of annual board meetings BM and the z-score suggesting that the number of meetings does not appear to have a significant effect on the risk-taking behavior of firms in this study. Finally, the ratio of debt to assets D/A is negatively correlated with risk-taking, suggesting that firms with more debt may be more inclined to take risks.

The panel regression outcomes and discussion

For the total number of women on the board TW (Table 4), the coefficient was 0.1213 which is positive and statistically significant. This suggests a positive between the total number of women on the board and the dependent variable which is the z-score. In other words, as the number of women on the board increases, the firm’s risk-taking decreases, because the z-score increases. This finding contrasts with studies that suggest gender diversity may increase risk-taking, as diverse groups often bring more innovative or risktolerant perspectives to decision-making. This result aligns more with the theory that women tend to be more risk-averse, leading to more conservative risk-taking behavior.

Table 4:The fixed effect model results.

Similarly, the existence of at least one woman on the board DW has a positive and significant effect (0.0941) on the Z-score. This result suggests that the presence of women on boards might reduce risk-taking, potentially indicating a more cautious approach to decision-making, as observed in previous studies. This finding could be linked to women’s traditionally lower risk tolerance compared to men; a hypothesis that has been explored in several studies. Nevertheless, for the variable the ratio of women to men on the board (RW), the coefficient (0.2667) is positive but not statistically significant. This suggests that the relative gender diversity (the ratio of women compared to men) does not have a significant impact on firm risk-taking in this study. Some studies have suggested that it is not just the absolute number of women on the board but their relative proportion that matters. However, in this case, the lack of significance implies that gender diversity, when measured as a ratio, might not significantly affect risk-taking behavior.

Globally, our results point to a more cautious risk-taking approach as the board is heterogenous. The results consistently show a negative relationship between gender diversity (whether measured by the total number of women, the presence of women, or the ratio women/men) and firm risk-taking, as measured by the Z-score. This suggests that increased gender diversity on the board may lead to more risk-averse behavior, contradicting the findings of some recent studies that suggest gender-diverse boards may encourage more risk-taking.

Studies such as Adams & Ferreira [2] have found that women tend to be more risk-averse, which could explain the negative relationship between gender diversity and risk-taking in this study. Similarly, Lückerath-Rovers [19] and Catalyst [9] also highlighted a more cautious approach to decision-making associated with female directors, which could be the underlying reason for the observed results. On the other hand, some studies like those by Ahern & Dittmar [3] and Mínguez-Vera [21] find that female directors can bring a different perspective to decision-making that may increase risk tolerance. The results of this study, however, lean toward the conservative end of the spectrum.

For the control variables, our results show that larger firms are less likely to engage in risk-taking. The coefficient related to the firm size is positive and statistically significant for the three models, showing a positive relationship between the firm size and the z-score which means a negative relationship between firm size and risk-taking. Larger firms typically have more resources and are better able to absorb risk, which might explain why they tend to engage in less risky behavior. This is in line with studies by Baker & Wurgler [4] and Myers [24], which show that larger firms are more conservative in their risk-taking decisions. On the Other hand, the coefficient for the variable Debt to assets D/A is negative and statistically significant for the three models reinforcing the conclusion that firms with higher leverage take on more risk. The negative relationship between D/A ratio and z-score (positive with risk-taking) is consistent across all models. This finding aligns with traditional financial theory, which suggests that highly leveraged firms may be more likely to take on risk to meet debt obligations. This result is supported by studies such as Fama & French [13] and Franck & Goyal [14], which discuss how firms with higher debt levels are more inclined to take on additional risk to generate higher returns.

The results of this study suggest that gender diversity on the board, especially when measured by the total number of women and the presence of at least one woman, is negatively correlated with firm risk-taking. This finding contrasts with some studies that suggest gender diversity can lead to more risk-taking, possibly due to different perspectives and decision-making approaches. However, the negative relationship found here could reflect the generally more conservative nature of female decision-making. Additionally, firm size is consistently negatively related to risk-taking, while debt levels positively influence risk-taking behavior. Future research could further explore the dynamics between gender diversity and risk-taking, perhaps considering factors such as industry-specific effects or the role of culture in moderating these relationships. While the results of this study provide strong empirical evidence regarding the link between gender diversity and firm risk-taking, it is important to note that the effect may vary depending on the industry, the ownership structure and other contextual factors. Further research should consider exploring these dimensions to gain a deeper understanding of the underlying mechanisms driving this relationship.

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