Friday, November 1, 2019
Study Finds Corporate Boards with All-Male Directors Suffer More Negative Stock Price Reactions from MeToo Claims than Those with Three or More Women Directors
Mary Brooke Billings, April Klein & Crystal Shi, Investors’ Response to the #MeToo Movement: Does Corporate Culture Matter?
This paper provides evidence that the #MeToo movement revised investors’ beliefs about the cost of fostering a culture that excludes women, as reflected by the absence of women directors in the board room. In particular, we document an overall negative market reaction tracking the timeline of events associated with the #MeToo movement, beginning with the Harvey Weinstein exposé in October of 2017 in the New York Times. This negative response concentrates in firms that have traditionally excluded women from their boards. In contrast, for companies that embrace the inclusion of women on their boards, this negative effect is moderated. Overall, investors appear to have revised their beliefs about the risks associated with future revelations of misconduct, and also about the value of having women in the board room shaping the culture of the firm.
Consistent with the view that the potential revelation of sexual misconduct in the workplace injects risk into publicly listed firms, we report an overall average cumulative abnormal return of -4.57%. We also note that 24 of the 37 days recorded significantly negative abnormal returns across all firms and, in fact, we detect significantly negative abnormal returns for each of the final 11 events on the #MeToo event timeline. This supports the notion that as the movement gained momentum, investors revised their beliefs about the potential impact of the movement.
This overall negative reaction to the #MeToo movement is borne out by subsequent responses by firms and Wall Street in general. Over 200 male executives were dismissed or demoted following allegations of sexual misconduct, with many of these men being replaced by women executives (Bach 2018, Carlsen et al. 2018). Attorneys have added “Weinstein Clauses”
and “#MeToo representations” into merger documents, which require target firms to be held financially responsible via “clawback” provisions for revelations of sexual misconduct after the deal is closed (Ahmed 2018, Reints 2018).
Cross-sectionally, we expect variations in market reactions to unfolding #MeToo events to be directly related to the market’s assessment of (1) how likely a firm is to have a past or future allegation of sexual misconduct revealed and (2) how well a firm is equipped to deal with these revelations. We predict and find evidence that variations in abnormal market returns are related to the gender composition of a corporation’s board of directors. Specifically, firms with boards made up exclusively of male directors suffer more negative stock price reactions, while firms with boards that include three or more women experience moderated stock price reactions.