The Mediating Effect of Innovation on the Relationship Between Gender Diversity and Financial Performance : Empirical evidence from listed Nordic companies in 2000-2022

Abstract

This paper explores the intricate relationship between boardroom gender diversity and firm performance. Aiming to establish a causal pattern of how female board members could affect firm performance, we propose innovation as a possible mediator. We define gender diversity as the female share on boards and cover financial performance from both accounting (ROA & ROE) and market (market-to-book ratio, Tobin’s Q) perspectives. Using R&D expenditures and patent applications as proxies for innovation, alongside other control variables, we conduct step-by-step mediation analysis on an unbalanced panel of 867 listed companies in Sweden, Norway, Finland, or Denmark from 2000 to 2022. We also use difference-in-differences (DiD) regressions, focusing on the 2008 board gender quota in Norway as an alternative approach when relevant. The mediation analysis using pooled OLS and panel regressions discovers no effect of diversity on market performance and no positive effect on accounting returns, which disappear when firm-fixed effects are added. The effect of diversity on innovation varies from negative to positive, depending on the model specifications. Innovation is associated with improved market performance and negative or no effect on accounting returns, depending on the fixed effects used. Innovation (R&D spending) is recognized to mediate the relationship between gender diversity and performance (ROA or ROE) in a few specific setups, but generally, evidence for innovation as a mediator is weak. Alternatively, the DiD regressions show some evidence of linking the quota and, thus, gender diversity to negative effects on ROA and market to book ratio and positive on R&D spending.