CEO Gender: Effects on Valuation and Risk

Introduction Top female corporate executives have been an understudied group for one simple reason: historically there have not been many of them. Oakley (2000) reports that only seven of the Fortune 1000 firms had a female chief executive officer (CEO) in 1997. In their study of corporate board members, Carter, Simkins, and Simpson (2003) describe the average firm in their sample gathered from the Fortune 1000 in 1997 as having only 1.1 women board members of 11 total board members. It also has been reported by Catalyst (2006), a nonprofit organization that focuses on women in business, that the average Fortune 500 firm in 2005 had 21.8 corporate officers and 3.6 of these positions were held by women. They also specify that eight Fortune 500 firms in 2005 had women CEOs, which represents a slight increase in female CEOs in these high profile firms. In 2006 alone, PepsiCo and Archer Daniel Midland appointed female CEOs. Thus, as increases in the number of prominent female business leaders occur over time, attitudes toward female business leaders may be changing. The glass ceiling may be disappearing. This study makes two contributions to the literature on women business leaders. We examine the differential effects of appointing female CEOs versus male CEOs on capital market measures of valuation and risk. Our study provides the financial market participants' point of view. Past studies that have used the perspective of the financial market to evaluate CEO appointments typically have not considered the role of gender on valuation or risk. Reinganum (1985) finds the stock market response to CEO appointments, on average, to be statistically insignificant. In contrast, Denis and Denis (1995) report the response to be positive and significant. Warner, Watts, and Wruck (1988) report that CEO appointments involving outsider appointments have favorable announcement returns, which suggests that the characteristics of the new CEO are important in determining the market reaction to CEO appointment announcements. Similarly, Worrell, Davidson, and Glascock (1993) find significant positive market reactions to outsider appointments, while no significant stock reactions are reported with inside promotions. Beatty and Zajac (1987) consider the possibility that market risk may shift following CEO changes and document a significant proportion of firms experience shifts in market risk. Examining appointments of females as CEOs is important because many studies suggest that there exists a gender stereotype (e.g., Heilman, Block, Martell, and Simon, 1989; Oakley, 2000; Atkinson, Baird, and Frye, 2003; Lee and James, 2007) and that gender influences performance and strategy (e.g., Hisrich and Brush, 1984; Powell and Ansic, 1997), which may influence the financial market. Recently, Lee and James (2007) examine female top executive appointments between 1990 and 2000, including a relatively small sample of 17 female CEOs. They not only find negative and significant valuation effects for firms that appoint female CEOs, but their analyses also indicate that female CEO appointments generate significantly more negative valuation effects than do male CEO appointments. They believe that investors may be more skeptical about the appointment of female executives due to the proportional rarity of female appointments and other gender stereotypes. We identify 70 announcements of female CEO appointments over the 19922007 period and develop a matched sample of 70 male CEO appointments. Our results show that the market favorably greets the news of selecting a female (male) CEO with statistically significant abnormal stock price reactions, with a mean three-day cumulative abnormal return of 3.55 percent (2.63 percent) and median of 0.26 percent (0.87 percent). Finding positive average stock price reaction to CEO appointments is consistent with past studies (e.g., Denis and Denis, 1995). Tests of the difference between valuation effects of female and male CEO appointments show there is no significant difference. …