Women in the boardroom and theirimpact on governance and performance
Female CEO Announcement Bryce Riggs 2015
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HEIDELBERG SCHOOL OF BUSINESS
The Announcement Effect of
Selecting Female CEOs on
Corporate Valuation
Bryce Riggs
Research Advisor: Dr. Haseeb J. Ahmed
2/2/2015
Abstract: Prevalence of female CEOs in “Corporate America” is still limited. Several studies have
established the factors that play into this phenomenon include but are not limited to: family
responsibilities, roles assigned by society, masculine corporate culture, lack of corporate equality, and
potential discrimination in the labor market. The presence of female CEOs in “Corporate America” are on
the rise as more firms promote female managers through the ranks. Little information has been gathered
and evaluated regarding how investors perceive the effect that the announcement of a female CEO will
have on future cash flow expectations. This paper posits that if a firm announces the selection of a female
CEO it will have a positive effect on future cash flow expectations resulting in a higher valuation of the
firm.
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1. Introduction
On August 3rd
, 1963, Phillip Graham, CEO of The Washington Post, committed suicide in
his home after dealing with years of mental illness. As a result of this, his wife, Katharine
Graham, became the first female CEO to run a Fortune 500 company and would eventually pave
the way for women in “Corporate America”. Graham outlined her frustrations caused by her
male counterparts in her memoir such as not being taken seriously and lack of confidence in her
decision making process (Graham, 1998). Little would Graham know, that more than a half
decade later women would still be feeling these same frustrations.
It has been established that discrimination in the labor market has had an effect on the
scarcity of females in key management positons. Discrimination in the workforce has created a
wage gap between males and females in key management positions. In a study of 42,000
management positons within publicly traded firms, the wage gap between genders was at least
42% in middle and high management positions. The study concluded that at least 15% of the
wage gap was caused as a result of scarcity of females in upper and middle management within
the firm (Bertrand, 2001).
Females in key management positions are scarce, limiting the opportunity for firms to
promote a female from within or reach outside the firm. Recent studies have revealed that
women currently hold 3 percent of top executive positions within the Fortune 500 firms (Brown,
2010). Using the current rate of females in top executive positions, the United Kingdom Equality
and Human Rights Commission Report projects that in 2081 women will outnumber men in the
board room (Alimo-Metcalfe, 2010). It has been established that discrimination exists in the
labor market that hinders the effect diversity has on performance of a firm.
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Diversity in the work force has been shown to increase the number of perspectives being
shared within a firm. An increase in the number of perspectives has a positive effect on creativity
within the work force (Ginsberg, 1994). Firms with a higher amount of creativity in their work
force have shown to have a positive effect on performance.
Stock performance is a function of expected future cash flow, risk, and the condition of
the prevailing stock market. The selection of a female as CEO send signals to the market on
differential cash flow expectations and less aggressive risk behavior. This paper will analyze the
announcement effect of selecting female CEOs on corporate valuation by analyzing returns of
stocks of Fortune 1000 firms. This paper postulates that if a firm announces the selection of a
female CEO it will have a positive effect on future cash flow expectations resulting in a higher
valuation of the firm.
This study uses the event study methodology and one tailed t-test was. The market-risk
model is applied to find abnormal returns within the event windows from 5 days prior to the
announcement and15 days after the announcement. The event windows are opened to examine
insider information prior to the announcement and price adjustment to new information after the
announcement (Kadioglu, 2008).
2. Literature Review
Through literature review, it has been established that an increase in diversity within a
firm will lead to a more productive workforce. This increase in productivity will lead to a higher
evaluation of future cash flow expectations (Barrington, 2001). It can be said that women tend to
manage others in a more interactive style, disregarding hierarchy in the firm in comparison to her
male counterparts. This allows for a greater level of teamwork across the firm and more
motivation and higher morale. Women have also been shown to bring different perspectives and
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ideas to managerial decision making process. These levels of differential impact range from their
own life experiences, creativity, decision-making styles, and problem solving skills. Along with
these perspectives, women in management are able to relate to female consumers, trading
partners, and employees in a way their male counterparts are not able to (Daily, Certo, & Dalton,
1999). An increase in available information will lead to better decision-making among
management (Wiersema & Bantel, 1992).
Another result of diversity within a firm is increased availability of talents and enhanced
innovation. Through literature review, it has been concluded that an increase in diversity within
a firm will lead to a better-developed talent pool for the company. Through incentives and
encouragement, women in management positions have shown to concentrate on developing and
mentoring their subordinates more than their male counterparts (Eagly, Johannesen-Schmidt, &
Van Engen, 2003). The presence of women in upper management have shown that women in all
levels of the firm are motivated and committed to the firm due to the fact that they believe their
firm is committed to their personal advancement within the organization (Bilimoria, 2006). An
increase in motivation has been linked to a greater level in creativity and productivity. An
increase in motivation has also shown to increase in the sharing of information within a firm that
facilitates a more creative workplace. Firms that have a creative workplace have led to a more
innovative firm. Innovation is a result of an increase in the number of perspectives being shared
within all levels of management. (Ginsberg, 1994). An increase in motivation has a favorable
impact on productivity, which in turn results in a positive effect on future cash flow expectations.
The literature review also revealed that as a result of prevailing discrimination in the
labor market the female candidate selected as CEO is required to have better track record of
professional experiences, superior performance, and incremental possession of talent and skills
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set in order to compete with their male counterparts. These characteristics have a positive impact
on the cash flow expectations for the firm. In a study of 786 women in key management
positions in the Fortune 1000, ninety-nine percent of the women reported that it was considered
important to prove their ability to outperform the discrimination of the labor market. The
sampled women reported in a follow-up interview that as a result of their ability to work hard
and develop unique skills they were able to separate themselves from their male counterparts
(Ragins, Mattis, &Townsend, 1998). As a result of increased discrimination in the labor market,
females in key management positions are required to have better-established experiences,
perspectives, and talents to compete with their male counterparts for the CEO position.
3. Data and empirical approach
The sample consists of 36 females that have been selected as a CEO from March 5, 1995
until October 8, 2014. This sample consists of publicly traded companies within the Fortune
1000 with a functional executive structure. This sample is evaluated through several categories,
such as: the announcement date, age at the announcement date, prior firm, and if the newly hired
woman CEO succeeded a male. The announcement date is the date that the Wall Street Journal,
New York Times or the hiring firm released a press release reporting the announcement of the
hiring of the female CEO used in the sample. The age of the female CEO on the date of
announcement is calculated through analyzing values obtained through research. The prior firm
was included in the information reported by the Wall Street Journal, New York Times or the press
release by the hiring firm. The selected female CEO had to be with the hiring firm for at least
one year prior to the announcement to be included as their prior firm. The CEO that the female
CEO was succeeding was included in the information released by the Wall Street Journal, New
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York Times or the press release by the hiring firm. This information was copied into a spreadsheet
to analyze.
The empirical approach to determine the effect of hiring a female CEO on the future cash
flow expectations is to measure the stock prices of each hiring firm during a twenty-one day
window surrounding the announcement. This window consists of five days before the
announcement, the day of announcement, and fifteen days following the announcement. This
data will be gathered and analyzed to determine if there is an abnormal increase or decrease in
the stock price of the firm surrounding the announcement of hiring a female CEO. A stable beta
will be used, assuming the market condition will have no impact on the firm. Data was gathered
five days prior to the announcement to capture the effect that insider information would have on
the expectations of future cash flows.
The first step in the study is to compute the expected value using the Capital Asset
Pricing Model. In this study, the expected value is the value of the firm’s stock based on the
market index.
represents the expected value of the firm’s stock. represents the interest rate of a
risk-free asset. In this study, the interest of treasury bills during the twenty-one day window was
used in the calculation. represents the Beta of the firm. Beta is the measure of the stock’s
volatility in relation the market. represents the return on the market index. In this study, the
S&P 500 was used as the market index.
The next step in the study is to find the daily return of the share of the firm and market
index. The S&P 500 was used as the market index. The daily return was recorded by find the
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value of the stock at close and subtracting it from the close value of the previous business day.
This value was then divided by the close value of the previous day to calculate percent change.
represents the percent change between the closing value of the firm on the current
day and the previous closing value of the firm on the previous day. represents the closing
value of the firm on the current day. represents the closing value of the firm on the previous
day.
The next step is analyzing the percent change of the firm and market index. The abnormal
return is the difference in percent change of the firm and market index.
represents the daily abnormal return of the firm’s stock. represents the daily
return of the firm’s stock. represents the daily return of the market index. This study uses the
S&P 500 as the market index.
The final step is to calculate the average return of the firm during the twenty-one day
time window surrounding the announcement. This is calculated by adding the daily abnormal
returns of all of the firm’s stock values in the sample and dividing out the number of firms in the
sample.
represents the sublimation of the daily abnormal returns of the firm’s stock values
in the sample. represents the number of firms in the sample.
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4. Empirical Results
A one tailed t-test was performed to determine the announcement effect of selecting female
CEOs on corporate valuation. The calculated t-value was -1.94 and the critical t-value was -1.69.
The critical t-value was determined using the degrees of freedom of 35.
H0: AAR ≤ 0 Negative or No Announcement Effect
H1: AAR > 0 Positive Announcement Effect
α = 5% (95% Confidence Level)
Calculated t-Value - 1.94
Critical t-Value - 1.69
Failed to Reject the Null Hypothesis since t-critical - 1.69 > t-calculated - 1.94 at 5%
Significance Level.
Conclusion
In this study, daily stock returns were observed of thirty-six Fortune1000 firms who announced
the hiring of a female CEO. Event study methodology was implemented to examine stock price
reactions five days prior and fifteen days after the announcement of the selection of a female
CEO. The results show that during the studied event window, which is defined as five days
prior to the announcement date and 15 days following the announcement date, the selection of
a female CEO has a negative impact on the valuation of firm. The data failed to support the
initial premise of this study that selection of a female CEO will have positive market impact.
This finding is problematic if the “Corporate America” is expressing a doubt on the capability of
a female to serve in the capacity of CEO. There are several major limitations of the
methodology used in this study. The limitations include the assumption of constant beta which
may be shifting with changing economic environment and unforeseen factors in the valuation of
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a firm that cannot be quantitatively described. A future direction of this paper could be an
analysis of differential industry impact on corporate valuation due to the announcement of a
female CEO.
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