Corporate Board Gender Diversity and Stock Performance: The Competence GAP or Institutional Investor Bias?

Abstract

Women now make up a sixth of corporate board members in the Fortune 500. Some scholars suggest that women board members boost financial performance, and thus stock price, by making boards more effective. Indeed, early studies showed a correlation between women on boards and both profits and stock price. But more rigorous studies have suggested that women have little effect on profits and may have negative effects on stock price. In a quantitative study of the consequences of female board member appointments, using data from over 400 leading corporations for the period 1997 to 2005, we find little evidence that women undermine board effectiveness but some evidence that institutional investors disfavor firms that appoint women board members. Following the appointment of a woman board member, firms do not experience decreases in profitability but do see decreases in share value. We then explore the effects of female appointments on shareholding by different groups of institutional investors. We predict that fund managers holding large positions in leading firms, whose actions are followed by the investment community, will take care not to sell off stock following accession of women to boards. We predict that the same will be true of all public pension fund managers, who have long been advocates of board diversity. But we suggest that small-holding institutional investors, and investors that do not manage public pension funds, may react negatively to the appointment of women to boards due to unwitting bias. The statistical results are consistent with the interpretation that bias among institutional investors who do not carefully scrutinize their own motives leads to reductions in shareholding after firms appoint women board members, and ensuing declines in share price.