We study the relation between firm financial stability and gender diversity in leadership and highlight its dependence on the initial financial conditions of the firm and the role played by the women leaders. Consistent with the glass cliff and the upper echelon theories, we find that close-to-default firms are more likely to appoint women top executives and that under their leadership, subsequent firms’ risk of default decreases in the short to medium term. In parallel, independent women directors are not associated with firms’ past credit risk, and their presence is more likely to increase the firm’s subsequent default risk, as established by the tokenism and signaling theory. Our results are robust to alternative specifications and endogeneity corrections.

We examine the effect of liability protection on the compensation of directors and on takeover outcomes. Consistent with the hypothesis that directors require additional compensation if they bear liability, we find that director compensation is higher for firms that provide less liability protection. Examining takeovers, we find evidence that takeovers of firms with protected directors are less likely to succeed. Moreover, firms with protected directors are more likely to accept a lower bid premium, and this finding is consistent with protected directors having reduced incentives to negotiate for the highest possible price during the acquisition. Overall, the results are consistent with the notion that director liability provisions have a significant impact both on director compensation and director duty.