Why Stock Price Drops When Women Join the Board

Bias, pure and simple, appears to be the reason why a company’s stock price tends to decrease after women take seats on the board of directors.

But what about the pervasive belief out there that adding women to corporate boards leads to financial blessings? Research from Catalyst, a nonprofit dedicated to advancing women in business, promotes this idea. A much-quoted 2007 study shows that at companies with high numbers of female directors, metrics such as return on equity, return on sales, and return on invested capital are substantially higher than at companies with very few or no female directors.

But studies looking specifically at the consequences of appointing women to corporate directorships show that stock performance tends to be unchanged or slightly worse after boards increase their gender diversity.

A group of researchers led by Harvard sociologist Frank Dobbin has been looking into the cause of the negative stock-price effect, and bias seems to be the culprit. Investor bias, that is.

One telltale finding pointing toward this conclusion is that decreases in stock valuation aren’t due to any falloff in corporate results — financial performance tends to remain unchanged after boards increase their gender diversity, Dobbin says.

Another is the behavior of “blockholders,” investors that each own 5% or more of a company’s shares. After the addition of women to the board, these institutional buyers tend to increase their holdings of the company’s shares. Non-blockholders tend to decrease them.

“These are moderately strong and pretty significant effects,” Dobbin recently said during a talk at Harvard Business School.

The blockholders, he conjectures, assume that their buying-and-selling actions are likely to be noticed by the public and the financial press, so they quash any bias they may feel toward female directors. The non-blockholders assume no such thing and are less likely to “censor their own inclinations to sell in response to growing board diversity,” according to a working paper by Dobbin, Jiwook Jung of Harvard, and Alexandra Kalev of the University of Arizona. In the absence of public scrutiny, these institutional investors’ “natural biases” are apparently unleashed.

Non-blockholders can have a significant effect on stock price. They controlled fully half of the shares in the companies that Dobbin and his colleagues studied — about twice as many as owned by the blockholders. So “the aggregate effect,” apparently, was to reduce the value of firms that appoint women directors, the paper says.

The research serves as a reminder of how deep and pervasive gender bias is. “Studies show we all hold gender biases and act on them intuitively — and in the blink of an eye,” Dobbin says.

by Andrew O’Connell from the Harvard Business Review

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