Why Investors React Negatively to Companies That Put Women on Their Boards

By Isabelle Solal and Kaisa Snellman
December 2, 2020

Despite persistent efforts to tackle underrepresentation of women on corporate boards, most boardrooms remain mostly male.

In a recent study, we examined board composition and financial data on 1,644 public companies in the U.S. between 1998 and 2011, controlling for numerous firm-specific characteristics. We find that companies that appoint women to the board see a decline in their market value for two years following the appointment, after which we no longer see any effect. Investors seem to be penalizing, rather than rewarding, companies that strive to be more inclusive. Why might the stock market react negatively to increases in board diversity?

It is not because companies perform worse after they appoint female directors. We find that companies are no less profitable after appointing female directors to the board than they were before the appointment. Nor are they more profitable.

Another explanation is that investors react to what they perceive to be a change in firm preferences. Increases in board diversity may signal to investors that the firm is motivated by social goals, and cares less about maximizing shareholder value. And to the extent investors care about shareholder value, they will penalize those companies they suspect are putting other goals first.

To test this theory, we conducted an experiment with 193 alumni and current students of a top-tier international business school. We found no difference in the perceived competence of men and women. There was, however, a difference in the perceived goals of a company. People believed that a company that appointed a woman cared more about improving the social performance of the firm and less about maximizing shareholder value.

If investors are indeed interpreting female appointments as a sign that the company is less committed to maximizing returns to their shareholders, the effect of increases in board diversity should be larger for those companies that demonstrate commitment to social goals in other ways. This is, in fact, what we found.

Our research suggests that shifting the diversity discourse away from gender to other dimensions of expertise and experience might, in fact, help women and other underrepresented groups. With less emphasis on gender, female appointments might one day no longer be perceived as checking off a social performance box, and signal nothing about firm preferences other than its commitment to hiring the best people for the job.

Copyright 2019 Harvard Business School Publishing Corp. Distributed by The New York Times Syndicate.


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