How Gender Equity on Boards Impacts Stock Price

Oct. 9, 2019

How Gender Equity on Boards Impacts Stock Price

TUCSON, Ariz. — In 2018, the state of California passed SB 826, providing for gender diverse representation on corporate boards by requiring each publicly held corporation headquartered in California to have at least one woman on its board of directors by the end of 2019. Further, beginning July 2021, the bill requires a minimum of two women directors on boards with five directors and at least three women on boards with six or more directors.

New research out of the Eller College of Management at the University of Arizona now finds that the more than 600 publicly traded firms in California experienced a large negative stock market reaction at the signing of the law – meaning the stock prices of these companies in general experienced a sell-off of -1.2% when the law was passed, suggesting that SB 826 is costly for affected firms.

"The negative reaction does not mean that adding female directors reduces firm value," said Kathleen Kahle, Thomas C. Moses Professor of Finance. "Rather, it can be interpreted as the law imposing a constrained optimization on board composition. However, given that California firms represent over $5 trillion of market value, a back-of-the-envelope calculation provides a total loss in value in excess of $60 billion."

Kahle and her co-authors, Daniel Greens and Vincent Intintoli, both from Clemson University, found that firms with a greater supply of female candidates and firms that can more easily replace existing directors or more easily attract female directors, were less negatively affected by the mandate. These findings suggest that male and female directors are largely interchangeable for some firms.

The trio also examined the direct costs of compliance and changes in board composition following SB 826. The costs of board expansion are negligible for the largest firms but substantial for the smallest. For many firms, the costs of expansion outweigh the penalties for non-compliance.

Of the 602 public firms headquartered in California, 171 (28%) need to add a female director by the end of 2019 and 531 (88%) need to add one or more women by 2021.

"We predict that younger, lesser-known companies will have more difficulty attracting female candidates," Kahle said. "The negative effect on younger firms is offset for firms associated with venture capital funds with a female presence, as they can help young firms attract and recruit female directors."

Researcher contact:
Kathleen Kahle
Eller College of Management

Media contacts:
Amy Schmitz
Eller College of Management

Andy Ober
University Communications

The University of Arizona, a land-grant university with two independently accredited medical schools, is one of the nation's top public universities, according to U.S. News & World Report. Established in 1885, the university is widely recognized as a student-centric university and has been designated as a Hispanic Serving Institution by the U.S. Department of Education. The university ranked in the top 25 in 2018 in research expenditures among all public universities, according to the National Science Foundation, and is a leading Research 1 institution with $687 million in annual research expenditures. The university advances the frontiers of interdisciplinary scholarship and entrepreneurial partnerships as a member of the Association of American Universities, the 62 leading public and private research universities in the U.S. It benefits the state with an estimated economic impact of $4.1 billion annually.