Earnings quality and corporate risk-taking: does board gender diversity matter?

Purpose This study aims to examine whether the synergy between earnings quality and board gender diversity influences corporate risk-taking. Design/methodology/approach A data set of 335 industrial Thai listed firms with 3,350 firm-year observations from 2011 to 2020 was analyzed using a fixed-effects model and an instrumental variable with a two-stage least squares regression approach. Findings Board gender diversity moderates the relationship between earnings quality and corporate risk-taking. When firms have stronger earnings quality, female directors may encourage firms to take more accounting-based risks to earn higher returns. This implies that female directors tend to have a high incentive to balance corporate risk. Importantly, female directors may influence to increase corporate risk-taking when firms use accounting-rather than cash-flow-based metrics to estimate corporate risks because of the accrual basis of accounting principles. The findings are consistent with the agency theory, the resource dependence theory and the approach/inhibition theory of power. However, when firms use cash flow-based risk-taking, board gender diversity may be a potential moderator to increase the magnitude of negative relationship between earnings quality and cash flow volatility. Thus, the measure of corporate risks is crucial. Originality/value To the best of the authors’ knowledge, this study is the first to explore whether female directors moderate the relationship between earnings quality and corporate risk-taking, and corporate risk measurements are crucial. It is also the first to investigate this issue in Thailand.