How Board Gender Quotas Affect Stock Prices

Women have traditionally suffered from discrimination in the labor market (Tatli et al., 2013) and are under-represented in upper management (Thams, Bendell and Terjesen, 2018). To address this widespread gender imbalance, many countries have implemented gender diversity policies ranging from enforceable quotas with hard or soft sanctions to voluntary recommendations included in corporate governance codes. While multiple European Union (EU) member states developed their own legislation, the European Parliament introduce on June 7 a gender quota so that, by 2026, “at least 40% of non-executive director posts or 33% of all director posts are occupied by the under-represented sex”.

The effectiveness of gender quotas is fiercely debated. On the positive side, they can increase board gender diversity, providing access to a broader knowledge base, more varied work experiences, and greater social networks than do all-male boards (Rixom, Jackson and Rixom, 2020). On the negative side, compulsory quotas could result in suboptimal director selection from a limited pool of female candidates, excessively large boards if new female directors are added, or a loss of valuable human capital if female directors replace long-tenured male directors.

Negative stock market reaction to the announcement of board gender quota laws in Norway (Ahern and Dittmar, 2012; Matsa and Miller, 2013) and California (Greene, Intintolia and Kahleb, 2020) suggests that investors believe that the negative aspects of board gender quotas outweigh the potential positives. However, these results cannot be generalized to the EU’s imposition of a gender quota in 2022. The Norwegian law was passed at an early stage, when empirical evidence supporting the business case for gender diversity was scarce. In addition, Americans and Europeans view government interventions very differently, potentially affecting public support for quota laws (Möhring and Teney, 2019).

In a new study, we  attempt to evaluate stock market reactions to the announcement of the EU quotas. Empirical analysis of the valuation effects and the determinants of the market reaction to this external shock can provide robust evidence on the relationship between board gender diversity and firm value in a quasi-natural experiment framework. In addition, comparison of the market reactions among firms under different regimens of board gender diversity enforcement (ranging from voluntary to punitive) provides a better understanding of investors’ perceptions of the effectiveness of the different gender diversity policies implemented across Europe over the past 20 years.

Our empirical results demonstrate that the stock market reactions to the announcement of the new EU legislation are positive, showing that investors are persuaded by the positive aspects of gender quota rules. In addition, we find that this positive valuation effect is stronger for firms in countries with softer or nonexistent gender diversity regulations than for firms in countries with sticter such regulations. Austria, Germany, Greece, the Netherlands, Portugal, and Spain have quota laws with weak or nonexistent penalties. Denmark, Finland, Ireland, Luxembourg, Poland, Romania, Slovenia, and Sweden have voluntary code recommendations. Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Hungary, Lithuania, and Malta have no gender regulation. By contrast, Belgium, France, and Italy have quota laws with hard penalties. Also, the market reactions are positively associated with the size of the gender gap that firms need to fill to meet the 33 percent board gender quota. In sum, our evidence suggests that the new EU regulation on gender quotas for boards has been applauded by investors, especially for firms with boards with a larger gender imbalance and which are thus expected to benefit more from this gender diversity legislation.

Given these wide differences among European countries and the lower female director presence achieved by voluntary gender diversity regulations as compared with compulsory regulations, debate has been growing over the suitability of EU binding quota regulations to foster fairness and equality of opportunities between men and women. The main issue is whether  more gender balance on boards should be voluntary or mandatory.

Our paper contributes to this debate by showing the positive assessment that the markets have made of the EU agreement and the perceived corrective capacity of this rule in countries and companies that have fallen short in their efforts to achieve board gender equality. Our results suggest that, even if avoiding the negative aspects of governmental intervention might be preferable, the market values board gender balance for its positive economic and social justice implications. Thus, our analysis of the EU legislation on gender quotas offers solid evidence that board gender quotas are perceived by investors as beneficial, particularly for firms exposed to a large gender imbalance.

REFERENCES

Ahern, K. R., and Dittmar, A. K. (2012). The changing of the boards: The impact on firm valuation of mandated female board representation. The Quarterly Journal of Economics127(1), 137-197.

Greene, D., Intintoli, V. J., and Kahle, K. M. (2020). Do board gender quotas affect firm value? Evidence from California Senate Bill No. 826. Journal of Corporate Finance, 60, 101526.

Matsa, D. A., and Miller, A. R. (2013). A female style in corporate leadership? Evidence from quotas. American Economic Journal: Applied Economics5(3), 136-69.

Möhring, K., and Teney, C. (2020). Equality prescribed? Contextual determinants of citizens’ support for gender boardroom quotas across Europe. Comparative European Politics18(4), 560-589.

Rixom, J. M., Jackson, M., and Rixom, B. A. (2022). Mandating Diversity on the Board of Directors: Do Investors Feel That Gender Quotas Result in Tokenism or Added Value for Firms? Journal of Business Ethics, 1-19.

Tatli, A., Vassilopoulou, J., and Özbilgin, M. (2013). An unrequited affinity between talent shortages and untapped female potential: The relevance of gender quotas for talent management in high growth potential economies of the Asia Pacific region. International Business Review22(3), 539-553.

Thams, Y., Bendell, B. L., and Terjesen, S. (2018). Explaining women’s presence on corporate boards: The institutionalization of progressive gender-related policies. Journal of Business Research86, 130-140.

This post comes to us from professors Carlos Fernandez at Oviedo University’s School of Economics and Business and Shams Pathan at Curtin University. It is based on their recent paper, “The Valuation Impact of Gender Quotas in the Boardroom: Evidence from the European Markets,” available here.

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