Executive Behaviour: Why the Female Tortoise Beats the Male Hare

Business decisions by top female executives are more highly valued by the stock market than those made by male executives
Two businesspeople in a race

The essentials

According to a study of male and female CEOs and CFOs, presented at a Queen's School of Business conference, women are less likely to make significant acquisitions than men and are less likely to issue debt. But the major decisions that female leaders make are more highly valued by the stock market: when men make an acquisition, the impact on the stock price is two percent less than when women make an acquisition, says Darren Kisgen, Associate Professor of Finance at the Carroll School of Management, Boston College.

Much as it may hurt men to read this, a provocative study of major finance and investment decisions made by male and female CEOs and CFOs shows that women make less rash decisions and are better at building shareholder value. Men, it turns out, tend to get tripped up by overconfidence.

“We went into this with no preconceived ideas,” says Darren Kisgen, Associate Professor of Finance at the Carroll School of Management, Boston College. “We thought it could go either way.”

Kisgen, who conducted the research with Jiekun Huang of National University of Singapore, presented his findings at the Queen's School of Business Behaviourial Finance Conference, held at Goodes Hall in May 2012.

As Kisgen points out, most corporate finance literature tends to ignore the role of executives in major decisions such as mergers or acquisitions, focusing instead on company characteristics such as financial distress. That seems an odd omission in this age of high-profile CEOs. “It makes intuitive sense, if you think of Steve Jobs (at Apple) or Jack Welch (at GE),” says Kisgen. “It’s hard to imagine these companies not being different with another CEO.”

There is, however, a significant body of research from other settings showing that men are overconfident relative to women and that women are more risk averse than men. Huang and Kisgen used this research as a basis for their own study on whether or not the gender of an executive has a material impact on major corporate decisions and subsequent shareholder value.

Building the study

The researchers first combed through the ExecuComp database, annual reports filled with the U.S. Securities and Exchange Commission, and news reports, all between 1993 and 2005, searching for female CEO and CFOs  of firms with assets over $500 million. They came up with a sample size of 130 firms with female senior executives. They then studied a variety of major corporate decisions, such as propensity to make a large acquisition and to issue debt.

Their findings show that women in general are less likely to make significant acquisitions than men and are less likely to issue debt. The companies they lead tend to grow more slowly.

The results were consistent with the idea of men being more likely overconfident than women, but to be certain, the researchers ran additional tests. Sure enough, the male executives had narrower bands on their earnings forecasts than women, were more likely to be replaced by company boards, and were less likely to exercise stock options early, all evidence, Kisgen says, that male executives are overconfident relative to female executives.

What does this mean for shareholder value? To find out, Huang and Kisgen looked at how the stock market reacted to the major decisions taken by the male and female executives. “We looked at announcement returns and found that the market reacts more positively to decisions made by women,” says Kisgen.

“Even if women are making fewer acquisitions, the market seems to react more positively relative to acquisitions that men make.“

The results were economically and statistically significant, says Kisgen. “When men make an acquisition, the impact on the stock price is two percent less than when women make an acquisition. That’s a pretty significant number.”

The market reacted in similar fashion to decisions made by male and female executives relating to debt offerings.

“These tests show that men are more likely to conduct value destroying acquisitions, consistent with male overconfidence,” Huang and Kisgen conclude in their paper.

Where are the female CEOs?

If female CEOs and CFOs are so effective at building shareholder value, why aren’t more of them found in the top ranks? A recent survey showed that only 35 of the Fortune 500 corporations are led by women. A survey in Canada indicates that women hold 18 percent of top officer positions.

There are a number of possible explanations. Kisgen says their study focused on a small yet significant range of corporate decisions; it is possible that men are much better at other types of corporate decisions. Another possible reason is that there are too few available women, although if female senior executives were a scare resource, one would expect their salaries to be bid up, which is not the case.

And you cannot rule out discrimination, says Kisgen. “It could be the boards are more likely to hire men, so women have to get over a bigger hurdle in order to get that job, and when they get over the hurdle they are better at what they do.”

Whatever the reason, the presence of women at the most senior levels of corporations is slowly becoming more evident. “If we tried to do this study 10 years ago,” Kisgen says, “we wouldn’t have had the data.”

Alan Morantz

Smith School of Business
Goodes Hall, Queen's University
Kingston, Ontario
Canada K7L 3N6

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