We examine investor responses to board diversity and highlight a previously unexplored mechanism to explain negative market reactions to senior female appointments. Drawing on signaling theory, we propose that an increase in board diversity leads investors to update their beliefs about firm preferences. Specifically, we argue that a gender-diverse board is interpreted as revealing a preference for diversity, and a weaker commitment to shareholder value. Consequently, firms with more female directors will be penalized. We test our argument using 14 years of panel data on U.S. public firms. We find that firms that increase board diversity suffer a decrease in market value, and that this effect is amplified for firms that have received higher ratings for their diversity practices across the organization. These results suggest that observers respond to the presence of female leaders not simply on their own merit, but as broader cues of firm preferences, and that firms may counteract any potential signaling effect through careful framing.I am not surprised by the finding but am agnostic by the causal mechanism. Market viewing that the board is pursuing non-value creating objectives is certainly plausible.
But I wonder whether only companies who have been riding a high profit/growth S-curve can afford such indulgences and that the appointment of more explicitly diverse boards might merely coincide with the entry of the firm into the commodity and brutal competition section of the top of the S-curve. I.e. it might not be market perception, it might not be poorer female governance, it might instead be a luxury belief that is coincident with company s-curve progression.
And of course, all of the potential plausible hypotheses might be simultaneously true and it is just a matter of relative degree of impact.
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