Are Female Executives More Risk-Averse than Male Executives?

Are Female Executives More Risk-Aversethan Male Executives?

ZAHID IQBAL*, SEWON O*, AND H. YOUNG BAEK**

Abstract

It is often argued that women are more risk averse than men. This paper providesadditional evidence on this issue by examining the stock selling behavior of male andfemale executives in response to stock option awards. When corporate executives sellshares of their firm upon new stock option awards, it is an indication that they areattempting to reduce risk through diversification of their personal portfolio. Morerigorous stock sales by female executives would indicate that they are more risk aversethan their male counterparts. However, this paper finds that male executives are morerisk averse by engaging in higher diversification-related stock sales than the femaleexecutives. It is also found that the stock sales by male executives approximate theoptimal hedge ratio. (JEL G34, G39)

Introduction

Are female executives more risk averse compared to their male counterparts? Thispaper addresses this issue by comparing stock trading behavior between male and femaleexecutives in response to stock option awards. A number of prior studies show thatwomen are more risk averse than men. Hersch [1996] finds that women make saferchoices than men when it comes to making risky consumer decisions such as smokingbehavior, seat-belt use, preventive dental care, and having regular blood pressurechecked. Pacula [1997] observes that women exhibit greater risk aversion to drug usethan men.

In the area of financial decisions, a number of prior studies document that femalesare less likely to take risk than males. Most of these studies examine the allocations ofpension assets by gender and find that females invest less in risky investments such ascommon stock [Bernasek and Shwiff, 2001; Bajtelsmit et al., 1999; Sunden and Surette,1998; Bajtelsmit and VanDerhei, 1997; Hinz, McCarthy, and Turner, 1997]. In Bernasekand Shwiff [2001], for example, gender is the most significant factor explaining theallocation of the defined contribution pension to stocks. They find men allocate more oftheir pension fund to stocks than women.

In addition to pension asset allocations, propensity of risk taking by gender is mea-sured by examining household wealth allocations and psychological traits. Jianakoplosand Bernasek [1998] in their survey paper examine the role of gender between householdwealth and other socioeconomic factors and the proportion of risky assets held. They findthat the magnitude of decrease in risk aversion due to an increase in household wealth issmaller for single women than for single men. Also, 63 percent of single women were notwilling to take any financial risk with their investments versus 43 percent for single men.

Atlantic Economic Journal (2006)34:63–74 * IAES 2006

DOI: 10.1007/s11293-006-6123-9

*Texas Southern University and **Nova Southeastern University—U.S.A.

63

Overall, single women are relatively more risk averse than single men. Using householddata, Barber and Odean [1999] show that women invest in less risky positions than menwhere risk is defined in terms of volatility of portfolio and individual security returns,beta of the security, and size of the investment. Sexton and Bowman-Upton [1990]examine the psychological traits of growth-oriented male and female entrepreneurs andfind that females score significantly less on traits related to risk-taking. In computerizedlaboratory experiments, Powell and Ansic [1997] observe that women are less riskseeking than men. Overall, these studies support the view that women prefer less riskthan men in their financial decision-making.1

A recent study by Ofek and Yermack [2000] shows that those managers who alreadyown a large investment in the firm’s stock will start selling their shares when new stockoptions are awarded to them. Such stock selling provides diversification benefits to theexecutive and is an indication that he is risk averse. According to Ofek and Yermack[2000], the magnitude of executive’s stock selling is closer to the optimal hedge ratio of60 percent. That is, the executive sells 600 shares that he already owns for every 1,000shares of new stock options that he receives.

Following prior empirical studies that women are generally more risk averse thanmen, the authors hypothesize that female executives will sell more shares of the firm’sstock than male executives in response to stock option awards. The authors also predictthat it will be the female executives who sell shares in proportion to the hedge ratio of 60percent. Contrary to the prediction, it is found that the female executives sell a smallernumber of shares than the male executives once new stock options are awarded. This istrue even after controlling for the levels of executive stock ownership. Male executiveswith high level of ownership seem to sell shares based on hedge ratio of 60 percent. Thefindings are consistent with those in Bliss and Potter [2002] that women take more riskthan men. Their empirical results show that women fund managers hold portfolios withmarginally higher risk than men.

One of the important features of this study is that it directly examines the attitude ofthe male and female executives towards portfolio diversification. While most of the priorstudies examined gender differences in allocations of pension and household wealth,none of the studies investigated the gender effect on adjustment in an individual’spersonal wealth due to addition of risky security (e.g., stock options). Upon new stockoption award, if female executives sell shares to hedge their portfolios and maleexecutives do not, or they do to a lesser degree, then it is an indication that femaleexecutives are less willing to take additional risk while male executives are risk takers.

The remainder of the paper is organized as follows. Data and sample are described inthe next section followed by empirical results and concluding remarks.

Data and Sample

All data for the empirical analysis are obtained from the 2000 version of Standardand Poors ExecuComp database. There are 20,622 executives listed on ExecuCompdatabase (on Fperson_ file), of which 905 are female executives and 19,717 are maleexecutives. There are 75,751 person-year observations from 1992 to 2000 with at leastone new stock option award, option exercise, or restricted stock award transaction. Ofthe 75,751 person-year observations, 72,895 transactions are by male executives and2,856 are by female executives. All share quantities are adjusted for stock splits and arestated in common year 2000 units in this study. Since the empirical analysis is based onannual change in shareholdings, the final sample does not include data from 1992. Afterdeleting observations with data that are preloads and not meaningful, the final sample

64 ZAHID IQBAL ET AL.

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FEMALE EXECUTIVES 65

includes 69,767 person-year observations of which 67,004 transactions are by maleexecutives and 2,763 are by female executives.

Panel A of Table 1 provides descriptive statistics for male and female executives. Onaverage, male (female) executives sold 7,180 (7,130) shares upon receipt of 136,150(111,520) new stock options each year during 1993Y2000. This indicates that there is nodifference in annual changes in shares between the male and female executives. Both themean and median values indicate that these two groups exhibit similar trading patterns.With respect to current stock ownership in the firm, male executives seem to have higherownership (0.80 percent) than the females (0.37 percent). Male executives also received

TABLE 2Executive Gender, Share Ownership, and Change in Shares Owned in Response to Stock

Option Awards for the Full Sample of Firms

H0: �i = 0

Panel A: Total SampleConstant �0 37.261a

Stock option award �1 j0.364b

Stock return �2 j0.009Industry variable �3 25.153c

N 31,692Adjusted R2 0.0236

Panel B: Interactions between stock option and ownership levelsConstant �0 24.275Stock option award for high ownership executive �1 j0.513b

Stock option award for low ownership executive �2 0.046b


N 31,666Adjusted R2 0.0358

Panel C: Interactions between stock option and genderConstant �0 37.036a

Stock option award for male executive �1 j0.366b

Stock option award for female executive �2 j0.209a


N 31,692Adjusted R2 0.0237

Panel D: Interactions between stock option, ownership levels, and genderConstant �0 24.299Stock option award for high-ownership male executive �1 j0.516b

Stock option award for low-ownership male executive �2 0.047b

Stock option award for high-ownership female executive �3 j0.233Stock option award for low-ownership female executive �4 j0.059Stock return �5 j0.010Industry variable �6 31.954c

N 31,666Adjusted R2 0.0359


more stock options (136,150) and exercised them more (126,903) than female executives(111,520 and 117,480). Cash compensations were also higher for male executives. Onaverage, male (female) executives earned $596,910 ($407,560) annually as salary andbonus. Overall, the total value of cash and equity-based compensation is higher for maleexecutives than female executives.

To address the problem of unequal variance in data analysis resulting from differentsample sizes between males and females, a randomly selected sample of 2,763observations for the male executives was created from the full sample of 67,004observations. This sub-sample will be used along with the full sample in the analysis.The descriptive statistics for this smaller sample are shown in Panel B of Table 2. Thedata exhibit similar characteristics as the full sample. There is no statistical difference inannual changes in shares between the male and female executives. Also, the maleexecutives own a higher percentage of the company’s stock than the female executives aswith the full sample. They received more equity-based compensation and exercised morestock options. The amount of cash compensation is higher for the male executives thanfor the female executives as well.

Empirical Results

The empirical analysis is based on changes in executive’s existing shares in responseto new stock option awards. A decrease in shareholdings would indicate that the ex-ecutive has reduced the risk of his personal portfolio due to additional risk associatedwith the new stock option awards. A decrease in shareholdings is, therefore, consistentwith the notion that the executive is reluctant to take additional risk resulting from thestock option awards. A reduction in already owned shares by the female executives and

Footnotes to Table 2

Regressions of annual changes in executive share ownership as a function of stock-based com-

pensation, executive gender, and executive share ownership levels for the full sample of person-

year observations. In Panel A, annual change in shares owned by each executive is regressed on

stock option awards (�1), current year’s stock returns (�2), and zero-one coded industry variable

(�3). In panel B, annual change in shares owned by each executive is regressed on two interaction

variables ((�1and �2), current year’s stock returns (�3), and zero-one coded industry variable

(�4).The interaction variables are computed as stock option award times zero-one coded variables

based on executive ownership levels. For example, the interaction variable for �1 is stock option

award times 1 if executive ownership is higher than or equal to 0.0643 percent, 0 if executive

ownership is less than 0.0643 percent. In panel C, annual change in shares owned by each executive

is regressed on two interaction variables (�1 and �2), current year’s stock returns (�3), and zero-one

coded in-dustry variable (�4). The interaction variables are computed as stock option award times

zero-one coded variables based on executive gender. For example, the interaction variable for �1 is

stock option award times 1 if executive male, 0 if executive is female. In panel D, annual change in

shares owned by each executive is regressed on four interaction variables (�1, �2, �3, and �4),

current year’s stock returns (�5), and zero-one coded industry variable (�6). The interaction

variables are computed as stock option award times zero-one coded variables based on executive

ownership levels and zero-one coded variable based on executive gender. For example, the

interaction variable for �1 is stock option award times 1 if ownership higher than or equal 0.0643

percent, 0 otherwise, times 1 if executive is male. Constants are expressed in thousands of shares.

Significance of the coefficients is measured by heteroskedastic t-statistic (not reported above).a and b denote significant differences from zero at the 10% and 5% levels, respectively.


not by the male executives would indicate that the female executives are risk-aversewhile the male executives are not.

Table 2 presents the result of the findings for the full sample of person-year ob-servations. There are four panels in Table 2. Panel A presents the results of the impact ofstock option awards on the changes in shareholdings of executives without consideringexecutive’s stock ownership and gender. The authors test the null hypotheses that stockoption awards have no impact on executive shareholdings. The hypothesis is tested byregressing annual changes in shares owned by the executives on their stock optionawards. The regression equation is as follows:

�St ¼ �0 þ �1 * Ct þ �2 * Rt þ �3 * It ð1Þ

where:

DSt = change in shares owned by an executive in year t,Ct = new stock options awarded in year t,Rt = current year’s (year t) dividend-adjusted stock returns, andIt = 1 if financial services industry, 0 otherwise�s are the parameter estimates.

The null hypothesis that �1 = 0 is tested. A positive value of coefficient �1 indicates anincrease in executive shareholdings due to an increase in new stock options and anegative value indicates a decrease in shareholdings due to an increase in new stockoptions. Since new stock options do not increase shareholdings, the null hypothesis isthat there is no change in shareholdings after receiving new stock options. Thealternative hypothesis is based on the premise that stock option awards increase therisk of the executive who will hedge the risk through stock selling. To achieve an optimalhedge, the executive will sell shares equal to the number of new stock options times thechange in option value per unit change in stock price. Ofek and Yermack [2000] find suchhedge ratio to be 0.60, i.e., the executive sells 600 shares for every 1,000 new stockoptions.

Current year’s stock return (Rt) and an industry variable (It) are included in theregression to control for their effect on changes in shareholdings. It is quite possible thatstock selling is more pronounced in the financial services industry which may haveexecutives who are financially savvy and understand the benefits of portfolio diver-sification. As a result, there may be an industry-related explanation for stock sales by theexecutives. The industry variable is coded 1 if the executives belong to financial servicesfirms (SIC Division H: finance, insurance, and real estate), 0 otherwise.

The results in Panel A indicate that the executives sell 364 shares of already ownedstock for every 1,000 shares of new stock options that they receive. The �1 value ofj0.364 is significant at the 5 percent level. Overall, there is an evidence that executivesadjust their shareholdings but at a lower proportion than the optimal hedge ratio of 60percent. Of the control variables, the industry variable seems to have a significantinfluence on stock sales by corporate executives. The �2 value of 25.153 indicates thatexecutives in the financial services industry seem sell more shares than executives innon-financial sectors.

Panel B of Table 2 presents the findings by the executive’s stock ownership in thefirm. Ofek and Yermack [2000] argue that portfolio diversification in response to newstock options takes place once the executive reaches a certain ownership level. In otherwords, executives’ willingness to reduce risk through portfolio diversification occurs


when their stock ownership in the firm is already high. The authors test this hypothesisby regressing annual changes in shares owned by the executives on two interactionvariables (�1 and �2) computed as new stock options times zero-one coded variable basedon the sample ownership median of 0.0643 percent. The null hypothesis that �i = 0 (fori = 1, 2) is tested. The regression is of the following form:

�St ¼ �0 þX2

i¼1

�i * Oit * Ct þ �3 * Rt þ �4* It ð2Þ

where:

DSt = change in shares owned by an executive in year t,O1t = 1 executive ownership is greater than or equal to 0.0643 percent year t, 0

otherwise,O2t = 1 executive ownership is less than 0.0643 percent year t, 0 otherwise,Ct = new stock options awarded in year t,Rt = current year’s (year t) dividend-adjusted stock returns,It = 1 if financial services industry, 0 otherwise, and�s are the parameter estimates.

In regression equation (2), a positive value of coefficient �1 would indicate an increasein shareholdings for high-ownership executives and a positive value of �2 would indicatesan increase in shareholdings for low-ownership executives. The results of the regressionindicate that the high-ownership executives sell 513 (�1 = j0.513) shares for every 1,000shares of new stock options and low-ownership executives buy 46 shares for every 1,000shares of new stock options. These results are consistent with the argument that theneed for stock selling in response to stock option awards increases with the executive’sownership level.

In Panel C of Table 2, the results based on gender are presented. The authors hy-pothesize that the risk-averse female executives will sell more shares in response to newstock options than the male executives. The authors test this hypothesis by regressingannual changes in shares owned by the executives on two interaction variables (�1 and�2) computed as new stock options times zero-one coded variable based on gender. Thenull hypothesis that �i = 0 (for i = 1, 2) is tested. The regression is given below:

�St ¼ �0 þX2

i¼1

�i * Git * Ct þ �3 * Rt þ �4 * It ð3Þ

where:

DSt = change in shares owned by an executive in year t,G1t = 1 executive is a male, 0 otherwise,G2t = 1 executive is a female, 0 otherwise,Ct = new stock options awarded in year t,Rt = current year’s (year t) dividend-adjusted stock returns,It = 1 if financial services industry, 0 otherwise, and

�s are the parameter estimates.

In regression equation (3), a positive value of coefficient �1 indicates an increase inshareholdings for male executives and a positive value of �2 indicates an increase in


shareholdings for female executives. The results show that the male executives sell 366shares (�1 = j0.366) for every 1,000 shares of new stock options and female executivessell 209 shares for every 1,000 shares of new stock options. Although both groups ofexecutives engage in stock sales, these results are contrary to the authors’ prediction thatthe risk-averse female executives will sell more than the male executives.

Finally, in Panel D, results by gender for high- and low-ownership levels are presented.Since diversification-related stock selling occurs at high-ownership level, the authors ex-amine if both male and female executives exhibit similar selling patterns when they are inthe high-ownership category. This hypothesis is tested by regressing annual changes in

TABLE 3Executive Gender, Share Ownership, and Change in Shares Owned in Response to Stock

Option Awards for the Smaller Sample of Randomly Selected Executives

H0: �i = 0

Panel A: Total Sample (Randomly Selected)

Constant �0 70.346Stock option award �1 j0.779a

Stock return �2 j0.278Industry variable �3 20.663

N 2,200Adjusted R2 0.194

Panel B: Interactions between stock option and ownership levels

Constant �0 47.669a

Stock option award for high ownership executive �1 j1.072b

Stock option award for low ownership executive �2 0.038Stock return �3 j0.305Industry variable �4 28.799a


Panel C: Interactions between stock option and gender

Constant �0 56.552Stock option award for male executive �1 j0.867a

Stock option award for female executive �2 j0.220a

Stock return �3 j0.286Industry variable �4 17.869


Panel D: Interactions between stock option, ownership levels, and gender

Constant �0 39.338b

Stock option award for high-ownership male executive �1 j1.238c

Stock option award for low-ownership male executive �2 0.048a

Stock option award for high-ownership female executive �3 j0.247a

Stock option award for low-ownership female executive �4 0.020Stock return �5 j0.273Industry variable �6 29.244a



shares owned by the executive on four interaction variables (�1, �2, �3, and �4) computedas new stock options times zero-one coded variable based on gender times zero-one codedvariable based on median executive share ownership of 0.0643 percent. The null hy-pothesis that �i = 0 (for i = 1, . . . , 4) is tested. The regression equation is as follows:

�St ¼ �0 þ �i * Oit * Git * Ct þ �5 * Rt þ �6 * It ð4Þ

for Oit (i = 1, 2) and Git (i = 1, 2)and �i = (i = 1, . . . , 4)where:

DSt = change in shares owned by an executive in year t,O1t = 1 executive ownership is greater than or equal to 0.0643 percent year t, 0

otherwise,O2t = 1 executive ownership is less than 0.0643 percent year t, 0 otherwise,G1t = 1 executive is a male, 0 otherwise,G2t = 1 executive is a female, 0 otherwise,Ct = new stock options awarded in year t,Rt = current year’s (year t) dividend-adjusted stock returns,It = 1 if financial services industry, 0 otherwise, and

�s are the parameter estimates.

In regression equation (4), a positive value of coefficient �1 indicates an increase inshareholdings for high-ownership male executives, a positive value of �2 indicates an

Footnotes to Table 3

Regressions of annual changes in executive share ownership as a function of stock-based com-

pensation, executive gender, and executive share ownership levels for the smaller sample of

randomly selected person-year observations. In Panel A, annual change in shares owned by each

executive is regressed on stock option awards (�1), current year’s stock returns (�2), and zero-one

coded industry variable (�3). In panel B, annual change in shares owned by each executive is

regressed on two interaction variables (�1and �2), current year’s stock returns (�3), and zero-one

coded industry variable (�4). The interaction variables are computed as stock option award times

zero-one coded variables based on executive ownership levels. For example, the interaction variable

for �1 is stock option award times 1 if executive ownership is higher than or equal to 0.0457

percent, 0 if executive ownership is less than 0.0457 percent. In panel C, annual change in shares

owned by each executive is regressed on two interaction variables (�1 and �2), current year’s stock

returns (�3), and zero-one coded industry variable (�4). The interaction variables are computed as

stock option award times zero-one coded variables based on executive gender. For example, the

interaction variable for �1 is stock option award times 1 if executive male, 0 if executive is female.

In panel D, annual change in shares owned by each executive is regressed on four interaction

variables (�1, �2, �3, and �4), current year’s stock returns (�5), and zero-one coded industry

variable (�6).The interaction variables are computed as stock option award times zero-one coded

variables based on executive ownership levels and zero-one coded variable based on executive

gender. For example, the interaction variable for �1 is stock option award times 1 if ownership

higher than or equal 0.0457 percent, 0 otherwise, times 1 if executive is male. Constants are

expressed in thousands of shares. Significance of the coefficients is measured by heteroskedastic t-

statistic (not reported above).a, b, and c denote significant differences from zero at the 10%, 5%, and 1% levels, respectively.


increase in shareholdings for low-ownership male executives, a positive value ofcoefficient �3 indicates an increase in shareholdings for high-ownership femaleexecutives, and a positive value of �4 indicates an increase in shareholdings for low-ownership female executives. The results show that only the high-ownership maleexecutives engage in significant stock selling. The �1 value of j0.516 indicates 516 sharesare being sold by these executives for every 1,000 new stock options.

Overall, the results in Table 2 are not consistent with the predictions that femaleexecutives are likely to show risk aversion by selling more of their own shares once stockoptions are awarded.

The results in Table 2 are based on a substantially bigger sample size for the maleexecutives (N = 67,004) when compared to the much smaller sample size for the femaleexecutives (N = 2,763). To circumvent the problem of difference in sample size, theabove regressions are run for a smaller subset of the male executives. The smaller sampleof male executives is created by randomly selecting 2,763 observations (equal number ofobservations in the female executive sample) from the full sample of the male executives.

Table 3 reports the findings of the regressions for the sample of female executivesand the randomly selected sample of male executives. The results for these smallersub-samples are similar to those reported in Table 2 although the intensity of stocksales appears to be higher. In Panel A, the �1 value of j0.779 indicates that theexecutives sell 779 shares in response to 1,000 new stock options. In Panel B, the �1 valueis j1.072 indicating that the high-ownership executives sell 1,072 shares for every 1,000stock options they receive. The findings on gender in Panel C show that the maleexecutives sell shares more than the female executives Y they sell 867 shares (�1 =j0.867) for every 1,000 new stock options while the female executives sell 220 shares(�2 = j0.220) for every 1,000 new stock options. The findings in Panel D show that thehigh-ownership male executives sell 1,238 shares (�1 = j1.238) per 1,000 new stockoptions and the high-ownership female executives sell 247 shares (�3 = j0.247) per1,000 new stock options.

Conclusions

Are female executives more risk averse than male executives? In this paper, theauthors consider this issue by examining the portfolio adjustment behavior of male andfemale executives in response to new stock option awards. Selling stocks to reduce therisk of the personal portfolio indicates that the executive is risk averse. The hypothesis isdrawn from prior empirical evidence that females take less risk than males in theirfinancial decisions. It is predicted that the risk-averse female executives would sell moreshares than their male counterparts. The findings are contrary to this prediction,however. The study finds that the female executives sell fewer shares than the maleexecutives once new stock options are granted. This is true even after controlling for theownership levels. Hence, female executives do not exhibit higher risk aversion than maleexecutives.

There can be several explanations for the inconsistent findings. Male executives maysell more shares because they trade more often than women.2 Also, an individual’s risk-taking propensity may depend on other attributes such as marital status [Sunden andSurette, 1998; Bernasek and Shwiff, 2001] and age [Lewellen et al., 1977]. For example, afemale executive’s decision to hold risky portfolio may not only depend on her attitudetowards risk but her partner’s attitude towards risk or some combination.3

One important implication of the findings of this study is that the board of directorsmay consider awarding incentive-based compensation such as stock options based on


gender. Since the female executives are likely to sell fewer shares in response to newoptions, they should be given more stock options than the male executives. For the maleexecutives, stock option award appears to be an ineffective mechanism to increase stockownership and reduce agency conflict between the managers and the shareholders. Othertypes of corporate governance mechanisms (e.g., board composition) may be moreappropriate for the male executives.

Footnotes

1Contrary to the findings reported in these studies, a few other studies observe that females seeksame or higher risk than men in their financial decisions. Schubert et al. [1999] find no genderdifferences in risk attitudes when identical investment and insurance decisions are presented tothe respondents. Bliss and Potter [2002] find evidence that women fund managers hold portfolioswith marginally more risk than men. Atkinson et al. [2003] observe that male- and female-managed funds do not differ significantly in taking risk. In Masters and Meir’s [1988] study, nodifferences were found in the risk-taking propensity of male versus female entrepreneurs.

2See Lewellen et al. [1977] for evidence that males trade more frequently than females.3Although the authors are aware that marital status should be a control variable, they are

unable to include it in the regression model because Standard and Poors ExecuComp database doesnot report this data. Alternatively, hand-collecting marital status data from a different source willbe extremely tedious for the samples that involve thousands of cases.

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Are Female Executives More Risk-Averse than Male Executives?

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