Increasing Gender Diversity in Corporate Boards: Are Firms Catering to Investor Preferences?

Abstract

We examine the drivers of increasing women’s representation on boards in American firms. During 1998-2014, the proportion of firms with female directors on their boards almost doubled to approximately 78%, while the percentage of female directors increased almost five-fold to a share of 15%. Our analysis shows that the documented increase in female representation on corporate boards is driven by the increasing propensity of firms to add more female directors, rather than changing firms’ characteristics. We use the catering theory to explain firms’ propensity to increase (or decrease) their board gender diversity, and show that when the premium to have women on board is positive (negative), firms are more likely to add (replace) female directors. We further find that firms with more women on their boards are historically associated with higher valuation premium. Finally, we observe that the magnitude of board gender diversity changes is positively related to the change in the lagged gender diversity premium. Our results indicate that board gender diversity can increase value in firms, catering to the demand of investors for gender-diversified boards.

Keywords: Gender Diversity, Board Directors, Propensity, Catering Theory