Why Investors React Negatively to Companies with Women on Boards

Despite persistent efforts to tackle underrepresentation of women on corporate boards, most boardrooms remain mostly male. The slow progress on gender diversity has frustrated policymakers, industry groups, and institutional investors, many of whom have publicly advocated for inclusion of women and minorities among the top ranks of management.

But are investors walking the walk on board diversity?

In a recent study, we examine board composition and financial data on 1,644 public companies in the U.S. between 1998 and 2011, controlling for numerous firm-specific characteristics like size and corporate governance structure. We find that companies that appoint women to the board see a decline in their market value for two years following the appointment (after which we no longer see any effect). In other words, investors seem to be penalizing, rather than rewarding, companies that strive to be more inclusive.

Why might the stock market react negatively to increases in board diversity?