Does Gender Matter in the Boardroom?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday January 2, 2012 at 11:04 am
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Editor’s Note: The following post comes to us from Renée Adams, Professor of Finance at the University of New South Wales; Stephen Gray, Professor of Finance at the University of Queensland; and John Nowland of the Department of Accountancy at City University of Hong Kong.

In our paper, Does Gender Matter in the Boardroom? Evidence from the Market Reaction to Mandatory New Director Announcements, we examine how the market perceives the appointment of female directors on average as well as how the market perceives their appointment relative to men. Many countries are introducing initiatives to promote boardroom gender diversity. Since the benefits and costs of boardroom diversity quotas in publicly-traded companies are ultimately borne by shareholders, it is important to examine how they react to increases in gender diversity. If the market reacts systematically differently to female appointments, this suggests that gender may matter above and beyond other director characteristics.

To date there is almost no evidence that the market reacts to female director appointments. One problem with conducting an event study of director appointments is that formal elections take place at the annual meeting and the announcement of the new director appointment often appears in the proxy statement or annual report. Because of the amount of information released around the annual meeting, it is difficult to attribute the stock price reaction around proxy or annual meeting dates to new director appointments. On the other hand, results based on director appointment announcements that appear in press releases or newspaper articles prior to proxy dates may be biased due to sample selection and strategic timing of press releases, as Rosenstein and Wyatt (1990) suggest. If companies time announcements depending on their expectation of the market’s reaction, abnormal returns around event dates may be systematically biased. This may be a particularly serious problem for event studies trying to identify gender effects since female directors are generally in the minority and their appointments may attract more attention than the appointment of male directors. Another problem is that if the appointment of female directors is anticipated, it will be difficult to detect the market reaction on the event date.

We circumvent these problems using unique data on director appointment announcements from Australia. While the governance and disclosure environment in Australia is otherwise very similar to that in the US, announcements of director appointments prior to the proxy statement are voluntary in the US, whereas they are mandatory in Australia. Specifically, the Australian Securities Exchange (ASX) requires companies to notify it immediately of any new director appointments. This is useful for our purposes since it means our data should have fewer biases due to sample selection and timing. Furthermore, companies may not notify any other market participant of the appointments until they have received confirmation from the ASX that it has already released this information via its website. Thus, appointments of directors in our sample are unlikely to have been widely anticipated by market participants.

We find that the market reaction to female appointees is, on average, positive and significant. This suggests that the market does not perceive the appointment of female directors to be primarily motivated by tokenism. Moreover, the average reaction for female appointees is roughly 2 percent higher than for male appointees even after controlling for other appointee characteristics, such as independence, expertise and qualifications. This suggests that the gender of directors matters per se.

To examine why gender may be value-relevant, we investigate whether the valuation premium for female directors is related to firm, industry and hiring board characteristics. We find that the market reaction for female appointees is significantly higher than for male appointees in firms with boards that are not majority independent or are small. It is also higher in big firms and firms with high market-to-book ratios. This evidence is consistent with the argument in Adams and Ferreira (2009) that firms with more monitoring needs may benefit more from female director appointments. We also find that female appointees are more valuable than male appointees in the natural resource sector and in firms that have achieved recognition for programs to improve workplace conditions for women. This suggests that the appointment of female directors may improve conditions for stakeholders, in particular female employees, and that shareholders view these improvements as value-enhancing.

Our evidence complements the growing literature arguing that firms may benefit from the appointment of female directors (e.g., Carter at al., 2003 and Erhardt et al., 2003). One problem with studies based on accounting measures of performance is that their interpretation is often confounded by endogeneity problems. Because better performing firms are presumably more likely to appoint female directors and women are more likely to accept positions in better performing firms, it is difficult to give a causal interpretation to a positive coefficient on the proportion of female directors in performance regressions (see Ferreira, 2010). Event studies avoid this problem to a large extent, because abnormal performance is conditioned on all information available at the time of the appointment of female directors.

If there are social, business or regulatory penalties for not abiding by boardroom diversity policies, then the appointment of a female director may relate to the avoidance of penalties rather than the gender of the director itself. To be able to assess the implications of policy pressure to increase boardroom diversity, we focus on female director appointments made prior to the start of the boardroom gender diversity debate in Australia. Thus, our evidence only applies to companies that voluntarily appoint female directors. If companies experience pressure to appoint female directors by law or through governance codes, it is not clear that shareholders would continue to view the appointment of female directors in a positive light. Ahern and Dittmar (2010) and Nygaard (2011) conduct event studies around the introduction of the Norwegian gender quota laws. They find conflicting results. Ahern and Dittmar (2010) find that the market reacts negatively to the quota laws. In a larger sample of firms, Nygaard (2011) finds that the market reacts positively on average. Our results complement these findings since we document heterogeneity in the stock price reaction to individual female director appointments. Furthermore, our findings are consistent with Ahern and Dittmar’s (2010) and Matsa and Miller’s (2010) conclusions that board composition is value-relevant.

The full paper is available for download here.

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