Diversity; Gender; Corporate Boards; Financial Markets; Shareholder Value; Social Performance; Market Signals;
The authors 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, the authors propose that an increase in board diversity leads investors to update their beliefs about firm preferences. Specifically, the authors 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.The authors test their argument using 14 years of panel data on U.S. public firms. The authors 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.