The Impact of Board Gender Diversity on European Firms’ Performance: The Moderating Role of Liquidity

Abstract

This study examines how board gender diversity affects listed non-financial European companies’ financial performance. Data from the Refinitiv Eikon Platform—LSEG and World Bank databases was used to complete the analysis. The total sample included 4257 companies for the period 2011–2023. This study examined board gender diversity and its interaction with liquidity while controlling for board characteristics such as board size, independence, and board meetings. Controlling for firm characteristics (firm size and leverage) and macroeconomic variables like inflation and GDP. This study estimated the connection using panel regression. Due to Hausman test significance, fixed effect estimation was used. The findings demonstrated a notable and favorable influence of board features, such as gender diversity, board independence, and board size, on European nonfinancial companies. Additionally, liquidity positively affects firm performance. Furthermore, the findings indicated that leverage had a significant negative impact on profitability. Finally, both the size and GDP have a significant beneficial impact on profitability. Our findings indicate that an increased representation of women on the board of directors is associated with greater independence among board members and a higher number of board members being hired. This, in turn, has a positive impact on profitability due to the extensive experience shared among board members. Additionally, this leads to improved governance, enabling better control over decisions and a greater focus on the long-term investment strategy of the company. Our results are robust, as are similar results reported by the GMM regression.

1. Introduction

Corporate strategy, board composition, and firm performance are crucial elements in today’s business environment that jointly influence the path and success of an organization (Al-Shaer et al. 2023). Ensuring the harmonization of these factors is crucial for maintaining a competitive edge and maximizing the value for shareholders (Salem et al. 2019). Multiple empirical investigations have clarified the intricate connections between these characteristics and their impact on company results in diverse geographical and sector-specific settings (Pucheta-Martínez and Gallego-Álvarez 2020). Shleifer and Vishny (1997) define corporate governance as the collection of methods by which capital providers ensure shareholder profitability, according to the literature on this topic. Denis and McConnell (2003) have highlighted the significance of differentiating between internal and external systems of governance and their relevance to fund providers at every stage of value creation. The mix of abilities, backgrounds, and diversity among the people who make up a board of directors has a big impact on how decisions are made (Mishra and Kapil 2018).

The ongoing academic discussion over the practical and financial effects of board gender diversity has not been conclusively settled in recent decades (Laique et al. 2023; Shahrour et al. 2022). The primary duty of a company’s board of directors is to offer strategic advice in decision-making by balancing the interests of managers and shareholders (Finkelstein et al. 2009). A perceptive corporate board serves as a valuable strategic asset, enabling firms to obtain a competitive edge in the market by leveraging their expertise, experience, and corporate networks (Palmberg et al. 2009). A substantial portion of the earlier literature has provided evidence for the importance of BGD in improving corporate performance and better risk management and governance (Lee et al. 2014). The main rationale behind board gender diversity’s favorable influence lies in the notion that female directors tend to exhibit risk aversion and ethical behavior (Guizani and Abdalkrim 2021).

The growth in major corporate failures in recent times has led to a lack of complete adherence to corporate governance. These breakdowns are frequently associated with inadequate corporate governance processes in organizations that seek to generate economic value (García-López et al. 2024). Adopting these recommended methods improves the efficiency of managers, increases the trust of investors, and eliminates circumstances that could decrease the worth of shareholders. It also minimizes waste and inefficiency (Geraldine et al. 2017). The substantial corporate losses and failures witnessed during the commencement of the global financial crisis in 2008 highlight the crucial role of strong corporate governance in maintaining a thriving business environment and protecting the interests of stakeholders (Lin et al. 2020). Due to the significant consequences of recent worldwide company collapses, it is crucial to prioritize the enhancement of corporate governance procedures in order to safeguard the interests of shareholders, strengthen the financial circumstances of nations, and decrease unemployment and crime rates (Awotomilusi et al. 2023).

This article aims to explore the intricate relationship between the board gender diversity and the performance of enterprises in the European Union region. This entails analyzing the interaction between board gender diversity and liquidity. While controlling for board characteristics such as board size, independence, and board meetings in order to determine their impact on company performance. Furthermore, the study seeks to highlight deficiencies in existing literature and suggest practical ideas for businesses to align their board structures with company strategy in order to improve firm performance. This examination contributes to the existing research by providing a comprehensive analysis that examines several corporate governance characteristics and their interconnections. This helps to clarify the previously documented associations, which have often been vague in prior studies. This empirical work particularly assesses corporate governance using measures such as gender diversity, board independence, board size, and the number of board meetings while interacting board gender diversity with liquidity. It also takes into account company characteristics like leverage and firm size, as well as macroeconomic variables such as GDP and inflation.

The following sections of this study are organized as follows: Section 2 will present and discuss the underlying theoretical foundation and the hypothesis development based on the previous research. In Section 3, the research methodology will be presented and clarified. Section 4 contains the results and analysis. Finally, the research is concluded in Section 5.

2. Literature Review

2.1. Theoretical Background

2.1.1. Agency Theory

Agency theory posits that the makeup of a board of directors is vital in addressing the principal-agent problem and minimizing agency costs. Factors such as the presence of independent directors, gender diversity, an ideal board size, and regular board meetings all contribute to improving the board’s capacity to properly oversee management (Pucheta-Martínez and Gallego-Álvarez 2020). This enhanced supervision ensures that management decisions are in line with the interests of shareholders, therefore improving the performance of the company (Mishra and Kapil 2017). Gaining insight into these connections facilitates the development of corporate governance frameworks that foster responsibility, openness, and the generation of wealth for shareholders (Amedi and Mustafa 2020). Aligning long-term strategic objectives with shareholder interests reduces agency costs and offers a comprehensive strategy for value maximization (Al-Shaer et al. 2023). One of the critical mechanisms to mitigate agency problems is an effective board of directors. According to research, there is a connection between the board’s abilities and company performance. (Al-Matari et al. 2012). Specifically, diversity in board composition, including gender and expertise diversity, has been shown to positively influence firm value (Awad et al. 2023). However, too large a board can be detrimental due to increased coordination costs and diluted responsibilities (Ghabayen 2012). Moreover, the value of a firm is not solely determined by corporate strategy but is also significantly influenced by the board’s composition (Johl et al. 2015).

2.1.2. Resource Dependency Theory

The Resource Dependency Theory posits that the board of directors assumes a pivotal role in promoting the efficient allocation and supervision of resources within a business. According to Awad et al. (2023), the board of directors’ organizational structure significantly influences the organization’s capacity to develop and implement efficient business strategy. Furthermore, the traits of the board, such as its size and gender diversity, have an apparent impact on the overall assessment of the company (Assenga et al. 2018). The aforementioned citation underscores the significance of a comprehensive board selection procedure appropriate to extend the value of a company through strategic decision-making (Mishra and Kapil 2017). Consequently, resource dependency theory supports the careful consideration of board membership to improve business strategy and, therefore, the value of the enterprise. In addition, Varghese and Sasidharan (2020) claim that the composition of the board has a direct influence on the firm’s capacity to adapt to changes in the market. The correlation between adaptability and enhanced financial performance is commonly observed, highlighting the importance of the board’s engagement in resource allocation and strategy formulation. In addition, to effectively manage interdependencies with external stakeholders and so reduce possible risks and vulnerabilities, the board plays a critical role (Johl et al. 2015). The importance of a well-designed board in enhancing corporate strategy and company value is underscored by resource dependency theory (Hung et al. 2019).

2.1.3. Social Identity Theory

Social Identity Theory offers a persuasive structure for comprehending the favorable and unfavorable effects of gender diversity on corporate boards. Gender diversity has the capacity to improve the efficacy of boards and corporate governance (Knippenberg and Ginkel 2022). However, it can also bring about difficulties associated with in-group biases, communication obstacles, and longer decision-making procedures. It is essential to acknowledge these possible adverse effects in order to devise effective ways for managing diversity (Bradley 2020). Boards can achieve higher efficiency and better organizational outcomes by creating an inclusive atmosphere and resolving the causes of conflict. This allows them to take advantage of the benefits of gender diversity while reducing its disadvantages. Nevertheless, in contrast to the theories discussed before, social identity theory (Tajfel 1978) states that diversity negatively affects the unity and stability of a board, which can result in more disputes and differences among board members (Pelled et al. 1999). Specifically, diversity among the boards can lead to individuals categorizing themselves and others, resulting in adverse perceptions across different groups (Varouchas et al. 2023). This can ultimately have a detrimental impact on the general functioning of the board. Adusei and Obeng (2019) argue that board gender diversity reduces the technical effectiveness of microfinance organizations. They suggest that heterogeneous groups face more communication disputes and hurdles compared to homogenous groups.

2.2. Previous Studies & Hypothesis Development

• Gender Diversity & Firm Performance

The agency hypothesis posits that gender diversity in boardrooms significantly influences a firm’s success. Al-Matari et al. (2012) and Al-Shaer et al. (2023) provide empirical support for the notion that a board composed of individuals from various backgrounds, especially including women, enhances business value by facilitating more effective decision-making and incorporating a wider range of perspectives. This particular variation is considered crucial in promoting the development of fresh ideas and establishing connections, hence reducing agency expenses and enhancing effective governance. Research conducted by Amedi and Mustafa (2020) and Assenga et al. (2018) indicates that female directors possess extensive educational qualifications and varied professional backgrounds, which enhance their capacity for making informed decisions. This aligns with the resource reliance hypothesis, which suggests that board members, especially women, can significantly enhance a firm’s resources due to their distinct connections and networks. The research conducted by Awad et al. (2023) and Black and Kim (2012) demonstrates a positive correlation between boards that are varied in terms of gender and higher business value across different market circumstances. This finding reinforces the significance of gender diversity in contributing to corporate performance. The correlation between the diversity of board gender and the success of a corporation, however, is not always straightforward or good. Johl et al. (2015) and Ghabayen (2012) discovered contrasting outcomes, indicating that although gender diversity can have a positive impact on corporate value, it is not consistently guaranteed. Hung et al. (2019) and Kanakriyah (2021) contend that the benefits of gender diversity might vary based on factors such as the company’s scale, sector, and management framework. In addition, Lei and Song (2012) and Mishra and Kapil (2018) argue that although gender diversity is beneficial, it should be complemented by other effective governance strategies in order to enhance business value. Pucheta-Martínez and Gallego-Álvarez (2020), Rodríguez-Fernández et al. (2014), and Salem et al. (2019) corroborate this perspective by illustrating that the influence of gender diversity on corporate performance is intricate and influenced by diverse external and internal factors. Therefore, Sobhan (2021) and Varghese and Sasidharan (2020) recognize the positive impact that gender diversity can have, but they stress that its effectiveness is contingent upon the broader circumstances of the company.

H1: 

There is a relation between gender diversity and the firm’s performance.

• Board Independence & Firm Performance

Board independence is a crucial element of corporate governance that has a substantial impact on the performance of a company. Al-Matari et al. (2012) and Al-Shaer et al. (2023) emphasize the significance of independent board members in enhancing the worth of a firm. The presence of independent directors is crucial since they offer unbiased oversight and provide strategic guidance that is not influenced by internal factors. Their role is particularly crucial in upholding effective governance and oversight, resulting in enhanced decision-making and risk mitigation. Amedi and Mustafa (2020) and Assenga et al. (2018) provide evidence to support the idea that companies with a higher proportion of independent directors tend to achieve better financial performance. The rise in numbers can be attributed to the independent directors’ ability to provide impartial assessments and their lack of connections to the company’s management, which minimizes any conflicts of interest and enhances the board’s overall responsibility and transparency. The relationship between board independence and business performance, however, is intricate and influenced by a multitude of factors. Black and Kim (2012) and Johl et al. (2015) argue that board independence can have a positive impact on corporate value. However, the effectiveness of board independence is contingent upon the specific circumstances of the firm, including factors such as its size, industry, and market conditions. Ghabayen (2012) and Hung et al. (2019) have identified that the benefits of board independence can vary across different geographical areas and economic sectors. Similarly, Lei and Song (2012) as well as Mishra and Kapil (2017) find that the impact of board independence on company value is intricate and interrelated with several governance indicators. Pucheta-Martínez and Gallego-Álvarez (2020) and Rodríguez-Fernández et al. (2014) emphasize the need to consider factors like board size, diversity, and directors’ experience when evaluating the effectiveness of board independence. Both Salem et al. (2019) and Sobhan (2021) recognize that board independence has the potential to positively affect firm performance. However, they also emphasize that the relationship between board independence and firm performance is not simple and is influenced by various governance and contextual factors, as noted by Varghese and Sasidharan (2020).

H2: 

There is a relation between board independence and the firm’s performance.

• Board Size & Firm Performance

Multiple studies have shown that the size of a company’s board of directors is a significant factor in determining its performance and worth. Resource dependence theory suggests that larger boards can enhance a company’s interactions with its external environment, leading to an increase in firm value, as indicated by studies conducted by Al-Matari et al. (2012) and Al-Shaer et al. (2023). The extensive knowledge and networks of a more comprehensive board might be valuable in making strategic decisions and acquiring external resources. Research conducted by Amedi and Mustafa (2020) and Assenga et al. (2018) indicates that larger boards have a beneficial impact on a firm’s financial performance due to the increased diversity of ideas and experiences they offer. Moreover, as stated by Black and Kim (2012) and Johl et al. (2015), selecting the right board size can positively impact governance and oversight, hence enhancing the overall performance of the company. These studies suggest that there is no universally applicable solution since the effectiveness of board size differs depending on the specific circumstances of the organization, such as its industry, corporate strategy, and market dynamics. Conversely, another study adopts a more subtle method for examining the connection between the size of the board and the profitability of a corporation. According to Ghabayen (2012) and Hung et al. (2019), larger boards can offer diverse perspectives and insights, but they can also lead to difficulties in coordination and decision-making, which may negatively impact company performance. Similarly, the studies conducted by Lei and Song (2012) and Mishra and Kapil (2018) reveal that having a board that is excessively large might result in inefficiencies, diluted accountability, and prolonged decision-making procedures. Pucheta-Martínez and Gallego-Álvarez (2020) and Rodríguez-Fernández et al. (2014) argue that while evaluating the effectiveness of a board, it is important to take into account factors such as board size, independence, diversity, and competency. Salem et al. (2019) endorse this perspective, and Sobhan (2021) acknowledges that although a larger board can offer unique perspectives and connections, its effect on company value is intricate and influenced by various internal and external circumstances, as highlighted by Varghese and Sasidharan (2020).

H3: 

There is a relation between the number of board members (BS) and the firm’s performance.

• Board Meetings and Firm Performance

Board meetings’ frequency is a crucial element in corporate governance, often indicating the board’s effectiveness and amount of involvement in managing the company. The frequency of board meetings can serve as a strong indicator of a board’s attitude towards good governance and its ability to promptly address company-related concerns, as demonstrated by research conducted by Al-Matari et al. (2012) and Al-Shaer et al. (2023). Regular meetings enhance expeditious decision-making and effective supervision, both of which are vital elements of sound governance and positively influence business performance. The efficacy of the board in supervising and offering guidance on business strategy is strongly associated with the frequency of board meetings, as demonstrated by Amedi and Mustafa (2020) and Assenga et al. (2018). This correlation has an impact on the effectiveness of the company’s operations and its financial outcomes. Moreover, Awad et al. (2023) and Black and Kim (2012) have proposed that enhancing the frequency of board meetings can enhance governance procedures by ensuring more comprehensive and consistent oversight of management decisions. Nevertheless, the correlation between the frequency of board meetings and the performance of the company is not direct. According to Johl et al. (2015) and Ghabayen (2012), regular meetings can enhance monitoring, but too many meetings may suggest issues within the company, such as ineffective management or crises, which could result in poor investor opinions. Hung et al. (2019) and Kanakriyah (2021) propose that the impact on business value is determined by the quality of meetings rather than the number of meetings. According to Lei and Song (2012) and Mishra and Kapil (2017), the efficacy of board meetings is influenced by the makeup and skill set of the board members. Pucheta-Martínez and Gallego-Álvarez (2020) and Rodríguez-Fernández et al. (2014) assert that the ideal frequency of meetings should be established by considering the particular requirements and conditions of the company. This perspective is endorsed by Salem et al. (2019) and Sobhan (2021), who observe that the frequency of board meetings is influenced by factors such as the firm’s size, industry, and governance structure, as also highlighted by Varghese and Sasidharan (2020).

H4: 

There is a relation between the number of board meetings and the firm’s performance.

3. Research Methodology

3.1. Study Sample

The LSEG Data Analytics platform indicates that there are 8050 non-financial companies listed in Europe. This information was obtained from the publicly available financial accounts of these companies, spanning from 2011 to 2023. The chosen sample comprises non-financial enterprises, which represent a significant fraction of the total number of companies in these nations. Significantly, this investigation did not include any financial institutions. This exclusion arises from the unique asset structures of financial institutions, characterized by high leverage ratios and industry-specific requirements that are applicable only to the financial sector and not to other industries. The ultimate sample consisted of 8050 companies from all European countries, whereas 3793 were removed owing to data unavailability.

Table 1. Sampling procedure.

Sampling Procedure	Description	Total Population	Sample Size
1-	All listed non-financial companies in all European countries	8050	-
2-	Data availability consideration	-	4257
3-	Selection of companies with data	-	4257
4-	Period covered	-	2011–2023
Country	Population	Final Sample
Croatia	77	51
Greece	156	93
Macedonia	154	68
Malta	44	16
Republic of Montenegro	240	106
Republic of Serbia	266	135
Slovenia	108	76
Spain	305	246
Belgium	191	117
Liechtenstein	4	2
Bulgaria	250	164
Czech Republic	26	9
Hungary	87	55
Poland	729	436
Romania	357	196
Russia	626	420
Austria	70	14
Slovak Republic	43	23
Estonia	37	19
Faroe Islands	3	1
Iceland	29	18
Republic of Ireland	97	46
Latvia	14	7
Lithuania	29	10
Norway	301	172
Sweden	963	412
Denmark	166	46
Finland	181	76
France	665	218
Germany	756	159
Italy	447	137
Luxembourg	94	34
Netherlands	171	49
Portugal	50	24
Switzerland	314	163
Total	8050	4257

Authors’ collection and analysis.

shows the sample breakdown by country.

3.2. Model Development

3.2.1. Dependent Variable: ROA

Research has demonstrated that return on assets (ROA) is a significant metric for evaluating a company’s operational performance (Singh et al. 2024). This metric, increasingly prevalent in financial research, evaluates the efficiency with which a corporation can create profits from its portfolio of assets. The return on assets can be calculated by dividing a company’s earnings by its total assets (Sotonye 2024). This ratio indicates the efficiency with which an organization utilizes its assets to generate profits. A higher return on assets ratio indicates that a company is efficiently utilizing its resources to generate profits, which is often seen positively by investors as an indication of future expansion and profitability (Naim and Aziz 2022). Conversely, a lower return on assets could suggest potential operational inefficiencies or underutilization of assets, which may reduce the attractiveness of the company to investors. This metric is crucial for investors and analysts seeking to comprehend not only a company’s profitability but also its asset efficiency in order to enhance their investment decisions (Pucheta-Martínez and Gallego-Álvarez 2020).

3.2.2. Independent Variable

• Gender Diversity

Various authors, such as Gul et al. (2011), have contended that women have a significant role in the field of business management. This is because women contribute distinct ideals and criteria to their profession, which differ from those employed by men (Solimene et al. 2017). According to Seierstad (2016), female directors on boards are considered important for two reasons: firstly, because of their impact on the business model, and secondly, because of their contribution to social justice. The first perspective is grounded on the belief that including female directors on boards will bring in fresh expertise, which in turn will positively influence the performance of the company (Liu et al. 2013). The second perspective emphasizes the importance of creating diversity on boards of directors to ensure representation of all team members. The first premise of this research asserts that women directors on boards can offer distinct perspectives in decision-making processes compared to men, which can greatly benefit businesses (Hoobler et al. 2016).

3.2.3. Moderating Variable

• Liquidity

This paper used the current ratio as a proxy for liquidity following Chandra et al. (2022) and Essel (2023). According to Nguyen et al. (2024) and Masood et al. (2016), a business’s ratio of liquidity shows the capacity to transform assets into cash to cover debts and payments. In addition, Hoggett et al. (2018) argued that investors can assess the organization’s short- and long-term liquidity and ability to cover liabilities using the liquidity ratio. Data et al. (2017) claimed that liquidity is a crucial indicator for assessing the stability and expansion of most companies; hence, it is imperative to effectively manage it. Hence, effective liquidity management plays a crucial role in determining the success or failure of a business. Omondi and Muturi (2013) assert that liquidity is essential for improving a company’s success. Therefore, companies that maintain appropriate levels of liquidity can achieve superior performance by effectively balancing the trade-off between risk and return (Shahrour et al. 2024).

3.2.4. Board Control Variables

• Board Independence

Independent directors are individuals who have no affiliation with the company’s management. As a result, they are unlikely to impede business choices with their personal viewpoints (Agrawal and Knoeber 1996). Independent directors serve as a significant control tool for organizations due to their ability to make more impartial judgments compared to management and shareholders (Qadorah and Fadzil 2018). They also offer fresh perspectives that differ from the conventional viewpoints, which tend to prioritize financial matters (Zahra and Stanton 1988). According to Ibrahim and Angelidis (1995), independent directors often prioritize the interests of all stakeholders, as most companies are unlikely to withhold valuable information from their stakeholders. Moreover, independent directors are primarily concerned with ensuring the proper conduct of firms and the achievement of stated objectives (Masulis et al. 2012). Therefore, it is anticipated that independent directors will exhibit greater objectivity and independence while evaluating the management and conduct of the firms compared to executive directors (Sonnenfeld 1981).

• Board Size

Several studies have documented a detrimental correlation between the size of a company’s board and its overall success. According to Mak and Kusnadi (2005) and O’Connell and Cramer (2010), there is evidence to suggest that a larger board size is associated with lower firm performance. However, there have been only a limited number of studies that have demonstrated a favorable correlation between the size of a company’s board and its success (Yermack 1996; Jackling and Johl 2009). When examining the correlation between board size and company performance, it is observed that larger boards have an impact on firm performance (Naim and Aziz 2022). There is a noticeable decline in board size for improved firm performance, since managing and maintaining larger boards is challenging and costly for both the management and the firm. Various research has provided evidence for this claim. For example, Cheng et al. (2008) discovered a notable correlation between a smaller board size and improved business performance.

• Board Meetings

According to Vafeas (1999), there is a negative relationship between the number of board meetings and firm value. This means that as board activity decreases, share values also decline. The frequency of board meetings has a negative impact on the performance of Malaysian listed corporations, as found by Johl et al. (2015). Other research has also discovered comparable adverse associations between the number of board meetings and the performance of the company. In contrast, only a small number of studies have indicated the favorable influence of the frequency of board meetings on the performance of a company. According to a study by Ntim and Osei (2011), it was revealed that the frequency of board meetings had a significant and favorable effect on firm performance.

3.2.5. Firm Control Variables

• Leverage

The ratio of a firm’s debts to assets, called leverage, affects its value (Awad et al. 2022). Al-Matari et al. (2012) and Al-Shaer et al. (2023) show that leverage affects corporate value in two ways. Leverage can boost a company’s value by funding expansion and development. Effective leverage management helps optimize resource utilization and improve financial performance, according to Amedi and Mustafa (2020) and Assenga et al. (2018). Jensen (1993) believed that leverage can increase a company’s value by reducing agency costs and improving resource efficiency. Moderate leverage may assist in balancing debt financing’s pros and cons, according to Awad et al. (2023). Whether leverage and corporate value are positively associated is unclear. Johl et al. (2015) and Black and Kim (2012) say excessive leverage can hurt a company’s finances, risk, and value. Hung et al. (2019) and Ghabayen (2012) concur that excessive leverage can raise interest rates and payback needs, affecting corporate performance and financial stability. Kanakriyah (2021) and Lei and Song (2012) state that leverage affects a company’s value depending on its sector, market, and economy. Mishra and Kapil (2017) say a balanced capital structure boosts an organization’s value. Leverage is useful, but Varghese and Sasidharan (2020) warn that it complicates a company’s value and must be handled wisely. Salem et al. (2019) and Sobhan (2021) note that many factors, including company governance, industry dynamics, and the economy, affect how well leverage increases firm value.

• Firm size

The logarithm of a company’s total assets is a frequent size metric (Awad et al. 2024), and it affects performance and value. The enormous resources and variety of larger organizations make them more resilient to market risks and fluctuations, according to Al-Shaer et al. (2023) and Al-Matari et al. (2012). This resiliency often leads to higher firm values since larger organizations can negotiate better and boost profit margins. Due to their scale, Amedi and Mustafa (2020) and Assenga et al. (2018) indicate that large organizations are more likely to adopt detailed risk management frameworks, which improves their stability and profitability. Studies like Hung et al. (2019) and Kanakriyah (2021) suggest that economies of scale can help larger companies raise capital and increase profits. However, firm size and value are not always linear or positive. Studies by Mishra and Kapil (2017) and Lei and Song (2012) imply that greater sizes may lose their benefits. Larger organizations may lose agility or administrative efficiency due to market fluctuations, as stated by Rodríguez-Fernández et al. (2014), Pucheta-Martínez and Gallego-Álvarez (2020). Salem et al. (2019) and Sobhan (2021) show that firm size may not always provide value in different markets and industries. Varghese and Sasidharan (2020) add that the relationship between size and value is complicated and contextual because the company’s ownership structure and board makeup also affect its value.

3.2.6. Country Control Variables

• GDP growth

Many financial economists’ studies real GDP growth’s impact on business value in various markets and industries. Businesses in economies with substantial GDP growth often enjoy value gains, according to Al-Shaer et al. (2023) and Al-Matari et al. (2012). Businesses develop and profit when economies grow because consumer spending, corporate investment, and market circumstances improve. Businesses benefit from GDP growth by increasing demand for their goods and services, according to Amedi and Mustafa (2020) and Assenga et al. (2018). Further research by Johl et al. (2015) and Black and Kim (2012) reveals that developing economies encourage enterprises to invest in innovation and expansion, increasing their market value. The relationship between company value and actual GDP growth may be difficult. Hung et al. (2019) and Kanakriyah (2021) noted that while economic growth might assist enterprises, management effectiveness, competitive tactics, and operational efficiency still matter. Lei and Song (2012) and Mishra and Kapil (2017) observe that GDP growth benefits certain industries more than others depending on the nature of economic expansion. Pucheta-Martínez and Gallego-Álvarez (2020) and Rodríguez-Fernández et al. (2014) emphasize the significance of considering internal and external elements, such as GDP growth, when assessing firm value. GDP development can provide a business-friendly environment, but market saturation and competitiveness still present challenges, according to Salem et al. (2019) and Sobhan (2021). Economic growth and business value are complicated and continually changing, according to Varghese and Sasidharan (2020). Global economic trends and policies also affect them.

• Inflation

Numerous studies have examined how inflation affects market valuation and company success. Al-Shaer et al. (2023) and Al-Matari et al. (2012) examine how inflation impacts pricing and operating costs. These elements may affect a company’s market value and profitability. High inflation may make it hard for firms to sustain profit margins due to increased labor and raw material expenses. However, mild inflation may promote spending and economic activity, benefiting companies. Amedi and Mustafa (2020) and Assenga et al. (2018) state that a firm’s worth depends on its capacity to pass on rising prices to consumers without losing demand. According to Johl et al. (2015) and Black and Kim (2012), a firm’s inflation exposure depends on its industry, with some industries more vulnerable to inflation. Ghabayen (2012) and Hung et al. (2019) state that inflation impacts interest rates, which affect how much a corporation borrows and invests, impacting its value. According to Kanakriyah (2021) and Lei and Song (2012), financial leverage and capital structure also mitigate inflation’s impact on firm value. Kanakriyah (2021) and Lei and Song (2012) similarly claim that corporate capital structure and financial leverage moderate inflation’s effect on firm value. Mishra and Kapil (2017) say businesses with good pricing power and cost management can mitigate inflation. Pucheta-Martínez and Gallego-Álvarez (2020) and Rodríguez-Fernández et al. (2014) suggest that inflation affects firm value mostly due to monetary policy reactions and the economy. Finally, Varghese and Sasidharan (2020) stress the importance of global economic trends when assessing inflation’s impact on firm value, while Salem et al. (2019) and Sobhan (2021) argue that inflation’s effects vary by market and economy.

3.3. Econometric Model

Several studies have examined the relationship between board characteristics and company success using various econometric techniques. This empirical paper applied the panel estimation method (fixed and random effect techniques) to investigate such a relation. This paper builds on the methods applied in previous research by Al-Matari et al. (2012), Al-Shaer et al. (2023), and Amedi and Mustafa (2020). The panel form of the data, which includes both cross-sectional and time-series variables, makes this technique appropriate. These approaches were successfully used in the studies of Assenga et al. (2018) and Black and Kim (2012), and they have been recognized for their value in handling the complexity of the firm productivity data. Moreover, panel data analysis captures the dynamic relationship between board features like gender diversity, size, and company performance by allowing evaluation of both within and between data changes. This strategy is in line with research by Hung et al. (2019) and Kanakriyah (2021), which highlight the importance of considering impacts that are both firm- and time-specific. The panel regression approaches offer an improved comprehension of the influence of board features on firm value over time, as noted by Lei and Song (2012) and Mishra and Kapil (2017).

Table 2. Measurement variables.

Variable	Abbreviation	Measurement	Reference
Dependent Variable
Firm Performance	ROA	EBIT divided by End-of-Year Total Assets	Al-Matari et al. (2012); Lei and Song (2012) and Mishra and Kapil (2017)
Independent Variables
Gender Diversity	GD	Number of Female Board Members divided by Total Number of Board Members	Awad et al. (2023) and Pucheta-Martínez and Gallego-Álvarez (2020).
Moderator Variable
Liquidity	Liq	Current Assets divided by Current Liabilities	Data et al. (2017) and Nguyen et al. (2024)
Board Control Variables
Board Independence	IND	Percentage of Independent Board Members obtained from Refinitiv Eikon Platform	Al-Shaer et al. (2023); Rodríguez-Fernández et al. (2014) and Varghese and Sasidharan (2020)
Board Size	BS	Number of Board Members obtained from Refinitiv Eikon Platform	Al-Matari et al. (2012); Ghabayen (2012) and Mishra and Kapil (2018).
Board Meetings	BM	Number of Board Meetings per year obtained from Refinitiv Eikon Platform	Lei and Song (2012) and Pucheta-Martínez and Gallego-Álvarez (2020)
Firm Control Variables
Leverage	LEV	End-of-Year Total Liabilities divided by End-of-Year Total Assets	Johl et al. (2015) And Hung et al. (2019)
Firm Size	FS	Natural Logarithm of Bank’s End-of-Year Total Assets	Al-Shaer et al. (2023) and Mishra and Kapil (2017, 2018)
Country Control Variables
GDP Growth	GDP	GDP Growth Rate	Lei and Song (2012) and Sobhan (2021)
Inflation Rate	INF	Annual Percentage of Consumer Price Index	Lei and Song (2012) and Sobhan (2021)

report further information about the variables of the study.

Model One (Baseline):

$$\begin{gathered} {ROA}_{i,t}={\beta }_0+{\beta }_1\left({GD}_{i,t}\right)+{\beta }_2\left({IND}_{i,t}\right)+{\beta }_3\left({BS}_{i,t}\right)+{\beta }_4\left({BM}_{i,t}\right)+{\beta }_5\left({LEV}_{i,t}\right)+{\beta }_6\left({FS}_{i,t}\right) \\ +{\beta }_7\left({Liq}_{i,t}\right)+{\beta }_8\left({GDP}_t\right)+{\beta }_9\left({INF}_t\right)+\epsilon \end{gathered}$$

Model Two (Interaction Model):

$$\begin{gathered} {ROA}_{i,t}={\beta }_0+{\beta }_1\left({GD}_{i,t}\right)+{\beta }_2\left({IND}_{i,t}\right)+{\beta }_3\left({BS}_{i,t}\right)+{\beta }_4\left({BM}_{i,t}\right)+{\beta }_5\left({LEV}_{i,t}\right)+{\beta }_6\left({FS}_{i,t}\right) \\ +{\beta }_7\left({Liq}_{i,t}\right)+{\beta }_8\left({GDP}_t\right)+{\beta }_9\left({INF}_t\right)+{\beta }_{10}\left({GD}_{i,t}\ast {Liq}_{i,t}\right)+\epsilon \end{gathered}$$

4. Results, Analysis, and Discussions

4.1. Descriptive Statistics

The below

Table 3. Descriptive statistics.

Variables	Mean	Std. Dev	Min	Max
ROA	0.031	0.096	−0.526	1.265
GD	0.215	0.085	0.00	0.568
IND	0.562	0.163	0.00	0.865
BS	10.124	1.562	2.00	24.00
BM	9.185	1.346	2.00	26.00
Liq	1.15	0.062	0.754	3.284
LEV	0.396	0.146	0.109	0.915
FS	19.865	1.967	6.452	27.749
GDP	0.019	0.045	−0.095	0.075
INF	0.025	0.026	−0.086	0.079

presents the descriptive statistics for the variables, offering a detailed summary of the important factors. Descriptive statistics offer a more comprehensive understanding of how variables are distributed by examining the measures of central tendency, variability, and range within the dataset (Lei and Song 2012). The dependent variable ROA has been found to have a mean value of 0.031 and a standard deviation of 0.096. Furthermore, the dependent variable has a substantial range of values, ranging from −0.526 to 1.265, indicating a notable fluctuation in the return on assets of companies over time.

Furthermore, the gender diversity (GD), which has an average value of 0.215, indicates that, on average, 22% of the board members in the firms are women. The board independence (IND) average of 0.562 indicates that a significant proportion of board members are independent. The standard deviation of the board size of 1.562 suggests a substantial variation among the organizations. In addition, the average number of board meetings (BM) each year is 9.185, suggesting that there are approximately 9 meetings per year in the frequency of board meetings. This finding aligns with the study conducted by Pucheta-Martínez and Gallego-Álvarez (2020). Regarding the control variables, the variable leverage (LEV) has an average value of 0.396, which represents that European companies on average tend to finance 39.6 percent of their assets through debt. The standard deviation of firm size (FS) is 1.967; this indicates the range of sizes among the organizations included in the sample. The national control variables show a low average for GDP growth (RGDP) at 0.019, indicating the limited growth in the nations included in the study.

4.2. Correlation Analysis

The below

Table 4. Correlation matrix analysis.

Variables	ROA	GD	IND	BS	BM	Liq	LEV	FS	GDP	INF
ROA	1.00
GD	0.125 ***	1.00
IND	0.086 ***	0.046 **	1.00
BS	0.136 ***	0.147 ***	0.076 ***	1.00
BM	−0.024	0.029	0.096 ***	0.074 ***	1.00
Liq	0.038 **	0.041 ***	0.020	0.057 **	0.063 **	1.00
LEV	−0.068 ***	0.049 ***	0.044 ***	0.136 ***	0.046 ***	−0.041 *	1.00
FS	0.146 ***	0.037	0.029	0.074 ***	0.039	0.066 **	0.086 ***	1.00
GDP	0.012	0.086 ***	0.079 **	0.009 ***	−0.016	0.024	−0.026	−0.016	1.00
INF	0.019	0.074 ***	0.103 ***	0.085 ***	0.061	0.014	−0.024	0.034	0.135 ***	1.00

Note: ***, **, and * show statistical significance at 1%, 5%, and 10%, respectively.

displays the correlation table that provides an overview of the relationships between the variables. A moderately positive connection between the dependent variable and gender diversity among enterprises has been noted. According to Al-Shaer et al. (2023), there is a positive correlation between the proportion of female members on a company’s board and its profitability. Furthermore, it is worth noting that there is a strong positive correlation of 0.125 between board diversity and the dependent variable. This also demonstrates that a higher level of board diversity is positively correlated with a firm’s profitability.

Board diversity and independence positively correlate to the ROA; however, a bigger board size is negatively correlated with the ROA. Another observation derived from the correlation matrix is that there is a significant negative correlation of −0.068 between the dependent variable and the firm’s leverage. This demonstrates that when the firm’s leverage increases, the firm’s ability to maximize its profit potential decreases. The data show a significant positive association between board size and ROA. High multicollinearity among variables can greatly affect the stability and reliability of regression analysis (Al-Shaer et al. 2023). Regression analysis must consider the Variance Inflation Factors to assess the level of multicollinearity among the variables. The variables in this study have a Variance Inflation Factor (VIF) of 1.39, indicating minimal presence of multicollinearity among the variables. A Variance Inflation Factor (VIF) exceeding five suggests a substantial presence of multicollinearity in the dataset (Awad et al. 2024).

4.3. Regression Results and Discussions

Table 5. Fixed-effect panel regression results.

Dependent Variable (ROA)
	Model 1		Model 2
Variable	Coefficient	Significance	Coefficient	Significance	VIF	Mean VIF
GD	0.056	0.001	0.062	0.000	1.49	1.39
GD* Liq			0.054	0.000
IND	0.028	0.052	0.035	0.025	1.65
BS	0.061	0.048	0.049	0.029	1.27
BM	0.032	0.125	0.054	0.162	1.34
Liq	0.052	0.026	0.074	0.000	1.48
LEV	−0.074	0.000	−0.058	0.000	1.20
FS	0.118	0.000	0.095	0.000	1.46
GDP	0.109	0.084	0.095	0.059	1.35
INF	0.529	0.162	0.448	0.152	1.31
Constant	1.316	0.018	1.739	0.011
F-statistics	96.513	0.000	106.289	0.000
R-squared	0.621		0.659
Hausman Test (χ2)	138.168 (0.000)		152.855 (0.000)

Authors’ analysis.

displays the results of the panel regression analysis conducted using ROA as the dependent variable and the independent factors. The F-statistic of 89.640 indicates that the regressed model is fit. Furthermore, the R-squared value of 0.6029 signifies that 60.29% of the variation in the dependent variables can be accounted for by the independent variables in the regression. The strong explanatory power demonstrates the usefulness of the selected factors in capturing the fluctuations in the dependent variable, as stated by Varghese and Sasidharan (2020). The Hausman test assesses the efficacy and suitability of fixed effects, as demonstrated by Lei and Song (2012). The chi-squared value of 146.765 is at a statistically significant level of 1%, showing that the fixed effects model is better suitable than a random effects model. This suggests that there are unchanging and unobserved elements that have an impact on the dependent variable, which supports the application of fixed effects.

The results confirm a significant positive association between the diversity of board gender and firm performance. The variable representing the proportion of female directors on boards has a positive association and is statistically significant. Several studies, such as Liu et al. (2013) and Kılıç and Kuzey (2016), give strong evidence that the participation of women on the board can result in improved firm performance. The results of our study indicate that including minority groups, such as female directors, on corporate boards can effectively represent and safeguard the demands and interests of shareholders (Webb 2004). This is achieved through the demonstration of impartial and discerning decision-making, which can potentially lead to improved performance of the company (Terjesen et al. 2016). Improved performance can also be attributed to the increased board independence that female directors bring (Awad et al. 2023). This is because directors with more traditional backgrounds typically do not raise the questions that may arise from directors of different ethnicities, cultural backgrounds, or genders, as argued by Carter et al. (2003). In addition, the presence of women on boards can bring a range of different perspectives and ideas to talks, resulting in policies that are more adaptable and inclusive (Nielsen and Huse 2010). This can lead to greater participation in the decision-making process and foster a more democratic approach to decision-making (Naim and Aziz 2022). Furthermore, the regression study has demonstrated a significant relationship between board independence and return on assets (ROA). This is in reference to the research carried out by Al-Shaer et al. (2023) and Rodríguez-Fernández et al. (2014). Therefore, the regression analysis demonstrates a favorable correlation between board independence and firm profitability (Awad et al. 2023). It is recommended that companies prioritize enhancing the board structure to increase its independence (Varghese and Sasidharan 2020).

The results illustrate a direct relationship between the size of the board and the performance of the firm. This research demonstrates that the size of a company’s board has a significant impact on its value. Larger boards have a favorable effect on the company’s profitability (Rodríguez-Fernández et al. 2014). Boards that include a large number of directors can contribute valuable human and social resources to the board. This is because they can bring a wide range of past experiences, talents, and professional backgrounds, as well as knowledge from related industries. This will be advantageous for the decision-making process (Pucheta-Martínez and Gallego-Álvarez 2020). Furthermore, CEOs or managers will have greater complexity in exerting pressure on directors within a larger board. Therefore, the size of the board has a significant influence on overseeing the management team and providing guidance and counsel, as suggested by Klein (1998) or Singh et al. (2024), which ultimately leads to improved company performance.

Regression analysis shows that a firm’s leverage negatively affects its profitability. The −0.098 coefficient at 1% significance indicates a statistically significant negative relationship between business leverage and profitability. Thus, the more debt a corporation takes on, the less it can maximize profits (Alsaeed 2006). The inverse correlation between leverage and profitability can be clarified using diverse theoretical frameworks and is substantiated by empirical evidence (Khalaf et al. 2023b). The trade-off theory emphasizes the equilibrium between the advantages of tax benefits and the disadvantages of bankruptcy expenses, whereas the pecking order theory underscores enterprises’ tendency towards utilizing internal funding (Abu Khalaf and Awad 2024). Agency theory examines how the use of debt affects the actions of managers and their choices regarding investments. Empirical research regularly demonstrates that a high level of debt is linked to financial difficulties, less investment, and decreased profitability (Awad et al. 2024). Comprehending this connection is vital for companies to make optimal decisions about their capital structure, which in turn improves long-term profitability and value generation (Alshaiba and Abu Khalaf 2024).

In addition, firm size boosts success due to market power, economies of scale, and resource access (Abu Khalaf et al. 2024). As production volume increases, economies of scale lower per-unit manufacturing costs for larger firms. Profit margins may increase due to this cost advantage (Ahmed et al. 2023). Larger companies likewise possess more market power, allowing them to negotiate better supplier arrangements and raise pricing, increasing revenue. They also have more money for R&D, marketing, and other profit-boosting strategies (Awad et al. 2023). Larger organizations additionally possess varied product lines and income streams, reducing risk and stabilizing profitability. These qualities help firm size boost profitability (Khalaf et al. 2023a).

Finally, results show a significant positive impact of macroeconomic variables on European nonfinancial companies’ profitability. Specifically, GDP increases profitability since it indicates economic health and activity (Khalaf et al. 2023b). GDP growth indicates an increasing economy, which boosts consumer spending, company investments, and product demand (Abdelazim and Khalaf 2024). Regarding enterprises, economic expansion increases sales and revenue because consumers and businesses have more disposable income (Abdullah et al. 2024). A strong GDP growth frequently leads to reduced unemployment, better wages, as well as higher consumer confidence that boosts demand. This higher demand might boost firm profits. In a booming economy, lower interest rates and fiscal stimulus cut costs and enhance profit margins for businesses. Therefore, increased GDP fosters company expansion and profitability (Sobhan 2021).

4.4. Robustness of Results

This section employs panel regression with different measurements to assure the reliability and stability of the findings; in specific, the dependent variable used is return on equity. In addition, GMM regression has been applied to check the robustness of results. GMM regression is a resilient and adaptable technique that provides notable benefits in addressing endogeneity, managing panel data, and producing efficient estimates in complicated circumstances. This methodology enables us to consider potential biases and offer a thorough comprehension of the connections between the variables. The robustness checks provide confirmation of the results’ validity, suggesting that the observed consequences are not influenced by particular model specifications or methodological choices, as evident in the below

Table 6. GMM regression results.

	Model 1		Model 2
Variable	Coefficient	Significance	Coefficient	Significance
GD	0.063	0.000	0.071	0.000
GD* Liq			0.060	0.000
IND	0.034	0.044	0.052	0.001
BS	0.072	0.039	0.040	0.015
BM	0.038	0.155	0.063	0.121
Liq	0.057	0.015	0.079	0.000
LEV	−0.079	0.000	−0.066	0.000
FS	0.132	0.000	0.072	0.000
GDP	0.128	0.050	0.088	0.042
INF	0.425	0.193	0.355	0.186
Constant	1.288	0.142	1.529	0.158
Hansen Test	0.596		0.628
AR (1)	0.366		0.426
AR (2)	0.305		0.396

.

5. Conclusions

This study investigated the association between the characteristics of corporate boards and return on assets (ROA), specifically focusing on non-financial corporations that are listed in Europe. The research was conducted using data from 4257 enterprises listed on the LSEG Data and Analytics portal from 2011 to 2023. The study employed panel regression models (fixed and random effects) to examine the impact of gender diversity, board independence, board size, and frequency of board meetings on the performance of companies, measured by return on assets. Additionally, the study included several control variables such as firm size, leverage, real GDP growth, and inflation rate. The Hausman test, a statistically significant test, verified the fixed effect hypothesis, yielding relevant results. The findings of our study emphasize the importance of different perspectives in corporate governance. We demonstrate that having a diverse gender composition and independent board members positively influences a company’s performance and profitability. It is worth noting that although an enlarged board did not have a significant impact on business value, there was insufficient statistical evidence to establish a positive correlation between the frequency of board meetings and firm performance. Moreover, the impact of control variables on the valuation of the business was significant, encompassing aspects such as the size of the organization and its leverage. The intricate nature of external economic influences on business performance is exemplified by the less apparent effects of macroeconomic factors such as real GDP growth and inflation rate. Ultimately, this study adds to the growing body of scholarly literature on corporate governance and business performance by offering fresh insights into how board qualities impact profitability in the European context. The findings highlight the importance of the membership of the board and the methods for governing in improving business success. This has practical implications for policymakers and corporate executives. Our study has certain limitations, namely that it solely examined enterprises within the European Union within a specified timeframe. Consequently, the findings cannot be generalized universally. Furthermore, variables such as disparities in industrial sectors may impact the outcomes.