How Gender Affect Corporate Financial Decisions and Risk Taking

A Study of General Motors Company from 2009 - 2015

Seminar Paper 2016 16 Pages

Business economics - Investment and Finance




Literature Review

A Case Study of General Motors (GM) Limited
Background Information

The Case Evaluation Criteria
(i) Leverage Position/Solvency Position
(ii) Altman’s score measure of bankruptcy
(iii) GM’s Mergers and Acquisition Activities




Appendix I: Formulas and Other Footnotes

Appendix II: Computed Ratios and Extracts


In recent times, the number of women featuring in the corporate world has significantly increased. Many women are now being appointed to management positions and boards of large institutions whilst others are successfully running their own businesses. Currently, female CEOs in the S&P 500 companies has increased to 21 (4.2%) compared with 12 (2.4%) in the year 2009 while FTSE 100 currently has 7 (7%) up from 4% in the year 2009 (Macdougall et al., 2016). It is now becoming increasingly evident that gender plays a vital role in investment and financing decisions of many organisations today as men and women tend to behave and act differently. Women are generally perceived to be detail-oriented, keen and sceptical in decision making relative to their male counterparts who are more risk tolerant. This study examines a number of empirical studies and other relevant literature to help justify as to whether or not, there is a relationship between gender, corporate financial decisions and risk taking.

Using General Motors (GM-US), a company that experienced a CEO and Board Chair changeover from male to female in early 2014 and 2016 respectively as a case study, the essay examines measures like leverage, solvency, M&A activities, and other metrics that can directly be attributed to CEO/Board chair’s decisions and how these decisions alter the company’s risk profile in the period prior to and after the transition.

Literature Review

The implications of gender on corporate financial decisions and risk taking has been documented in several studies over the last few decades. The findings on the subject matter can be discussed from three main strands/viewpoints. Firstly, gender-based behavioural differences on risk perception, secondly, effects of CEO changeover (from male to female or vice versa) on corporate risk-taking, and finally the effect of gender differences in corporate financial decision making.

The initial discussion of this topic is in Byrnes, at. al., (1999) where they conducted a meta-analysis of 150 studies focusing on women and men’s propensities towards risk taking in their everyday decision-making. In this study, they established that men are highly likely to take more risk on average than women. In a similar study, Barber and Odean (2001) while attempting to predict the confidence of investors based on gender also indicates that male tend exude overconfidence in specific areas than women but emphasized that women are also overconfident in other areas where men are not. Proceeding on this track, other recent researchers have tried to explore the areas where women and men behave differently. In a study that faults the current findings, Weber, et. al., (2002) examined how women and men perceive risks within five (5) distinctive areas; healthy and safety, financial, recreational, ethical and social decisions. Female risk aversion featured more prominently in four out of five domains but women were perceived to be high-risk takers in aspects of social decision making. The four categories showed males perceiving greater risk because they generally have a greater propensity of engaging in riskier events than women.

Looking at the corporate world, it has consistently been established that women CEOs on average bear less risk relative to their male counterparts. While examining both privately and publicly listed companies run by women in Europe, Faccio, et, al., (2016) used data from Amadeus Top 250,000 and Worldscope to run a number of regressions with an aim of establishing how gender diversity compares with differences in corporate outcomes/decisions and concluded that given alternatives, female CEOs would choose investments and financing decisions with minimal risks compared to male CEOs who would prefer risky investments. The same conclusion was drawn by Palvia, et.al., (2014) whose findings indicate that female board chairs and CEOs are less risk-taking than men and that firms which are led by women are more conservative and less prone to financial risks as a result of prudent decisions.

The second thread talks about gender transition. This refers to a change in management from either female to male CEOs or vice versa in the same company through examining their actions, decisions, and the consequences of their decisions over different periods as this will form the basis of comparing their risk-taking tendency/behaviour. On this note, Faccio, et al. (2016) used a sample of companies that were facing a change in CEO from either female to male or contrariwise to enable them to establish whether there is a change in risk profile within same companies with CEOs of a different gender. After examining the behaviours, decisions, and outcomes of events before and after the transition, the trio concluded that female CEOs exhibit different risk attitudes from their male counterparts. In this regard, a change from male to female was attributed to a decrease in overall risking taking both in financing and investment. These results were consistent with Farrell and Hersch (2005) who established that there is always an inverse relationship in risk taking on the regime of female CEO compared to that of the male. However, Adams and Funk (2012) presented contradicting views when he asserted that female directors/CEOs are predisposed to more risks than men because of the simple fact that they would want to be perceived as more competent and superior relative to predecessors.

The third strand examines the effects of gender differences in corporate financial decision making where this study looks at the behaviours and decisions of each gender independently and how they affect corporate financial decisions and risk taking. Again, Faccio, et al. (2016) clearly, indicates that female CEOs have a tendency to avoid increased debt financing and riskier projects. This attitude greatly affects corporate financial decisions because the risk avoidance behaviour of female CEOs leads to both a reduction in profits and decelerated corporate investment policies. These actions may bring agency conflicts to some investors (shareholders) who have different risk attitudes. When making financing decisions, women tend to display less overconfidence about a financial judgment as compared to men (Barber and Odean, 2001). While concurring with these assertions Palvia, et al. (2014) indicates that female-led banks tend to keep high levels of capital and therefore considered to be conservative. To further emphasise this point Faccio, et al., (2016) regressed a number of variables to establish the link between CEO gender and risk-taking where they established that companies led by female CEOs employ less debt financing in their capital structure thus lowering their companies’ financial risks compared to those led by male CEOs. This implies that female-led firms are more likely survive through stressful times relative to those led by men.

This notwithstanding, other studies find females’ risk avoidance behaviour to have significant and positive implications on financial decisions in some banking institutions. For instance, Palvia, et al. (2014) in a study involving US commercial banks during the financial crisis concluded that firms led by female CEOs are less likely to suffer financial distress because of their low-risk tolerance. Specifically, they concluded that smaller banks with female CEOs are less likely to fail during the financial crisis. This infers that conservatism is important to warrant the survival of small banks who may not have adequate ability to absorb external distress. Generally, the study observes that Faccio, et.al. (2016) incorporated both gender and age as the variables to help them predict the risk attitude and capital allocation efficiency in the regression model, they did not consider other factors like company size, situational factors, educational/professional qualifications and the experience of CEOs together with gender for their findings to be more comprehensive and objective. Furthermore, differences in risk perception depend on the prevailing circumstances and one’s ability to quantify the risk associated with taking certain decisions. For instance, variation in risk perception is highly probable when making decisions in an environment of risk where the probability of results is known with precision as compared to decisions taken under uncertainty where one relies on individual judgement/opinion. In both scenarios, the risk-taking of an individual will depend on CEO’s personality as opposed to gender thus implying that women take less risk than men under specific circumstances, but not in others as indicated in the reviewed papers.

There is no universal agreement on the subject matter based on the aforementioned studies but it is sensible to conclude that gender has an effect on corporate financial decisions. This is because, the risk-aversion tendency in female CEOs increases their propensity to approach financing and investment decisions in a more conservative manner and settling in less risk-low return portfolios compared to male CEOs who are likely to go for high-risk portfolios and use greater proportions of debt instruments/financing in their capital structure thus exposing their companies to increased levels of financial risks.

A Case Study of General Motors Limited

Abbildung in dieser Leseprobe nicht enthaltenSource: GM Website, (2016)

Background Information

General Motors is an automotive multinational corporation established in 1908 which is currently headquartered in Detroit, Michigan with a global presence in over 150 countries. In the year 2001, under the leadership of a male CEO, GM’s vehicles developed ignition switch faults but the management took no efforts to rectify the defects consequently resulting in a significant reduction in the company’s revenues and increased litigations. These risky and negligent actions plunged the company into financial distress whereby in 2009 it filed for a bankruptcy, closed several brands and sold others out to a china based company but was later reorganised through government support into its current state.

From the time Marry Barra, the current female CEO was appointed in early 2014, the company’s risk profile has drastically changed. Knowing well that men have a tendency to neglect lowest risk alternatives but pursue medium to higher risk alternatives as opposed female who strive for lower risk alternatives, she started by recalling over 2 million[1] Cobalts and other vehicles with faulty ignition switches that were responsible for 124 deaths and 275 injuries (Financial Times, 2014). The 2014’s CEO transition and Mrs Barra’s preliminary risk-taking decision to recall over 2 million vehicles barely two months after assuming office and makes GM a perfect fit for this study.

The Case Evaluation Metrics

This essay conducts a time series analysis by examining the impact of the CEOs decisions and behaviours in four main constituents while taking gender transition as the common denominator. Key components examined includes; leverage volatility, Altman’s score measure of bankruptcy, and finally M&A activities prior to and after the CEO transition.

(i) Leverage Position/Solvency Position

The study extracted data from Bloomberg and GM’s financial statements to help in assessing the company’s fiscal year-ends’ leverage prior to and after the transition. The leverage of the company (expressed as a percentage)[2] represents its total debt to total financing which is deteriorating over time. It can be observed in figure 1.0 that the average leverage ratio between 2009-2013 (period of male CEO) is 0.32 as compared to the leverage ratio after the transition of 0.59. This is an increase of 84.3% on average which is above the acceptable industry average of 0.5. Additionally, the GM’s debt to equity ratio is weakening over time from 0.55 in 2009 to 1.57 in the year 2015[3]. For instance, if we compare the two years prior to and after CEO transition, the average debt to equity in the year 2014 and 2015 of 1.44 is more than twice as much as the average ratio in 2012 and 2013 (0.64). The same case applies to debt to total assets. This indicates that GM started to aggressively finance its activities with more debt immediately after CEO transition, consequently increasing the risk levels of the company. These assertions can and be confirmed by the credit trendline below where from the year 2013 (transition period), there is a 31.84% increase in the use of debt instruments in the company’s capital structure, however, the increase in debt levels can be attributed to borrowed funding to facilitate repairs of recalled vehicles.


[1] Exact number of vehicles recalled were 2.61 Million cars alone

[2] See computed ratios in Appendix II (Leverage Ratio)

[3] See Computed Ratios in Appendix II (Debt to Equity Ratio)


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gender affect corporate financial decisions risk taking study general motors company




Title: How Gender Affect Corporate Financial Decisions and Risk Taking