Photo credit: Felix Zeiffer

Do Gender Quotas Harm Firms?

New study of Mannheim Professor reveals that gender quotas negatively impact firm value.

60 million dollars in market capitalization has the average Californian firm lost since the introduction of a mandatory board gender quota in October 2018. This is the conclusion of a new study by Professor Alexandra Niessen-Ruenzi and her colleagues from the University fo St. Gallen, Switzerland, and the University of California, Berkeley, USA.

In October 2018, California became the first U.S. state to introduce a mandatory board gender quota for all firms headquartered in California. The result: Within only three months, female board representation increased by 0,5 percentage points. During the same time period however, the average corresponding firm has lost 60 million US-Dollars in market value. This is the result of a study by Professor Niessen-Ruenzi and her colleagues which has recently been published in the Social Science Research Network (SSRN).

“That the short-term stock market reaction of affected firms towards a board gender quota is negative has already been observed in other countries such as Norway and Germany”, explains Niessen-Ruenzi. What did surprise her, was the magnitude of the Californian reaction. Perhaps the California-based firm are expecting further regulations regarding equality or environmental protection, says the financial expert. The study also reveals that stock prices of firms based in other U.S. states fell as well, even though they were not directly affected by the regulation. One possible explanation for this effect is that investors might now expect the introduction of such quotas in other states as well, following the Californian example. California has often been a forerunner in terms of progressive legislations, for example with respect to the legalization of cannabis or the introduction of minimum wages.

According to the study, one reason for the negative stock market reaction seems to be that investors are afraid that the pool of qualified women is not large enough to fulfill the demand created by the new law. In fact, the results show that newly appointed female directors are on average six years younger than their male counterparts and have four years less of industry experience. “A mandatory gender quota is beneficial for the newly promoted female managers, but bad for women in general as long as they don’t bring along the same qualifications and experience”, concludes Niessen-Ruenzi.

In order to reduce the negative economic impact of gender quotas, the researchers suggest firms should invest more into the professional qualification of women. A more family-friendly environment and good childcare offerings would also help women to progress their careers – and firms to recruit better candidates for their management positions.