Women on the board

Women on the board of companies have a positive impact on their value. A study examined the corporate board structure in seven European countries.

09.03.2021 · Economics, Social Sciences, Spatial Research · ZEW – Leibniz Centre for European Economic Research · News · Research result

Women on the board of companies have a positive impact on their value. Crucially, the quota for women in corporate management – also known as a boardroom quota – primarily results in the scaling down inefficient corporate processes. These are the findings of a study conducted by ZEW Mannheim and the New Economic School in Moscow. The study examined both the corporate board structure and the characteristics of its board members in seven European countries with regulations concerning this quota which range from light to rigorous. A further step was to investigate the effects of the quota on firms’ value and operations, using financial data on the years before the quota was announced and after the compliance date had passed.

The German government recently passed a legal reform to bring more women onto the boards of listed and equally co-determined companies. Compared to other European countries, the boardroom quota in Germany has been set rather low and still remains subject to criticism amongst the general public. The current study analyses the effects of this quota based on data from Norway, Italy, Spain, the Netherlands, Belgium and France where legally binding quotas of between 33 and 40 per cent apply, as well as the United Kingdom, where a 25 per cent quota is recommended.

Findings from the study show that a higher percentage of women on the board positively affects company value. If the proportion of female directors grows by ten percentage points, then company value, measured by the Tobin’s Q ratio, also increases by 2.1 units. The researchers also record a higher annual buy-and-hold return of 1.6 to 3.8 per cent in the annually compounded equivalent for European companies that have a higher proportion of women on their boards. “These effects are not anticipated by the market when a regulation is announced. In the long-term, investors therefore also benefit from gender equality on company boards,” says Valentina Melentyeva, an author of the study and researcher in the ZEW Research Department “Social Policy and Redistribution”.

Board characteristics remain the same despite quota

Researchers examined the board structure as well as board members’ qualifications in detail to clarify the mechanisms behind the effects described above. Companies often do not increase the number of board members upon the introduction of this quota, but instead fill existing seats proportionately with female board members. Moreover, the qualifications of the board members do not decrease as the number of women on the board increases. Average age, experience and network size all remain the same. However, participation in board meetings increases significantly with more women sitting on the board.

In a further analysis, the researchers examined the effects on company value in more detail. If the proportion of women on the board grows by ten percentage points, the ratio of market value of equity to assets increases by about 5.3 units. The researchers do not attribute this increase in the market value of equity to a higher debt-equity ratio or a higher dividend pay-out, but instead to a lower tendency to so-called ‘empire building’. Empire building describes the heightened interest of leaders in external corporate growth, such as through the formation of a group or a merger as well as the increase of assets. This can negatively affect a business if it aims solely to control resources and exert greater influence, rather than seeking optimal allocation of resources, maximising profits and acting in the interests of its shareholders. In economic research, empire building has so far been attributed predominantly to male leaders.

Women are less prone to empire building

Companies with a boardroom quota spend less money on empire building. If the proportion of women on the board grows by ten percentage points, then a company is 10 percentage points less likely to incur any merger-related expenses whilst business turnover remains unchanged. Furthermore, new capital assets are purchased less frequently, but no less revenue is generated from their sale. The researchers conclude from this that an increased proportion of women not only means that inefficient assets are more likely to be written off, but also that new assets are acquired less frequently. “This change in behaviour is welcomed by the market and cannot be explained by a higher willingness to take risks or a change in board qualifications, but by the fact that women are actually less prone to empire building than their male colleagues,” says Melentyeva.

These effects do indeed go hand in hand with a temporary decrease in turnover, which causes some operational performance indicators to decline. However, the ratio of operating costs to assets does not change. Revenue-based margins and labour productivity also remain stable. According to the study, as these declines are not accompanied by lower market values, this is further evidence that companies with a higher proportion of women on the board are more likely to cut inefficient assets. This becomes apparent with regard to higher enterprise value in the long-term. “Compared to earlier studies that found the quota-induced presence of women to have a negative impact on company value, our findings show that no political dilemma exists in this regard. In fact, company value and buy-and-hold return are both likely to increase, and less of a prominence of empire building within the company seems to be the main reason for this. Therefore, gender diversity on the board is not only beneficial to society, but also for the economic efficiency of a company,” says ZEW researcher Melentyeva.

Original publication

Olga Kuzmina und Valentina Melentyeva (2021): Gender diversity in corporate boards: Evidence from quota-implied discontinuities. Discussion Paper, NO. 21-023 | 03/2021, ZEW, Download the study (PDF)

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