Women Don’t Mean Business? Gender Penalty in Board Composition

Using data from two panel studies on U.S. firms and an online experiment, we examine investor reactions to increases in board diversity. Contrary to conventional wisdom, we find that appointing female directors has no impact on objective measures of performance, such as ROA, but does result in a systematic decrease in market value. Similarly, we find that companies that are committed to diversity more generally suffer a decline in value. We argue that the gender penalty in board appointments is not due to discrimination based on stereotype bias, but instead results from inferences investors make about the firm. The appointment of a female director is interpreted as a diversity measure, and as a result we find that it signals an underlying preference for social goals, to the detriment of shareholder value maximization. Observing this signal prompts some investors to sell their holdings, which in turn causes the firm’s market value to drop. This mechanism operates irrespective of the actual or perceived competence of the female appointee. We discuss the implications of our results for understanding gender inequality in leadership.