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HEIDELBERG SCHOOL OF BUSINESS

The Announcement Effect of

Selecting Female CEOs on

Corporate Valuation

Bryce Riggs Research Advisor: Dr. Haseeb J. Ahmed

2/2/2015

Abstract: Prevalence of female CEOs in “Corporate America” is still limited. Several studies have established the factors that play into this phenomenon include but are not limited to: family

responsibilities, roles assigned by society, masculine corporate culture, lack of corporate equality, and

potential discrimination in the labor market. The presence of female CEOs in “Corporate America” are on

the rise as more firms promote female managers through the ranks. Little information has been gathered and evaluated regarding how investors perceive the effect that the announcement of a female CEO will

have on future cash flow expectations. This paper posits that if a firm announces the selection of a female

CEO it will have a positive effect on future cash flow expectations resulting in a higher valuation of the firm.

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1. Introduction

On August 3rd

, 1963, Phillip Graham, CEO of The Washington Post, committed suicide in

his home after dealing with years of mental illness. As a result of this, his wife, Katharine

Graham, became the first female CEO to run a Fortune 500 company and would eventually pave

the way for women in “Corporate America”. Graham outlined her frustrations caused by her

male counterparts in her memoir such as not being taken seriously and lack of confidence in her

decision making process (Graham, 1998). Little would Graham know, that more than a half

decade later women would still be feeling these same frustrations.

It has been established that discrimination in the labor market has had an effect on the

scarcity of females in key management positons. Discrimination in the workforce has created a

wage gap between males and females in key management positions. In a study of 42,000

management positons within publicly traded firms, the wage gap between genders was at least

42% in middle and high management positions. The study concluded that at least 15% of the

wage gap was caused as a result of scarcity of females in upper and middle management within

the firm (Bertrand, 2001).

Females in key management positions are scarce, limiting the opportunity for firms to

promote a female from within or reach outside the firm. Recent studies have revealed that

women currently hold 3 percent of top executive positions within the Fortune 500 firms (Brown,

2010). Using the current rate of females in top executive positions, the United Kingdom Equality

and Human Rights Commission Report projects that in 2081 women will outnumber men in the

board room (Alimo-Metcalfe, 2010). It has been established that discrimination exists in the

labor market that hinders the effect diversity has on performance of a firm.

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Diversity in the work force has been shown to increase the number of perspectives being

shared within a firm. An increase in the number of perspectives has a positive effect on creativity

within the work force (Ginsberg, 1994). Firms with a higher amount of creativity in their work

force have shown to have a positive effect on performance.

Stock performance is a function of expected future cash flow, risk, and the condition of

the prevailing stock market. The selection of a female as CEO send signals to the market on

differential cash flow expectations and less aggressive risk behavior. This paper will analyze the

announcement effect of selecting female CEOs on corporate valuation by analyzing returns of

stocks of Fortune 1000 firms. This paper postulates that if a firm announces the selection of a

female CEO it will have a positive effect on future cash flow expectations resulting in a higher

valuation of the firm.

This study uses the event study methodology and one tailed t-test was. The market-risk

model is applied to find abnormal returns within the event windows from 5 days prior to the

announcement and15 days after the announcement. The event windows are opened to examine

insider information prior to the announcement and price adjustment to new information after the

announcement (Kadioglu, 2008).

2. Literature Review

Through literature review, it has been established that an increase in diversity within a

firm will lead to a more productive workforce. This increase in productivity will lead to a higher

evaluation of future cash flow expectations (Barrington, 2001). It can be said that women tend to

manage others in a more interactive style, disregarding hierarchy in the firm in comparison to her

male counterparts. This allows for a greater level of teamwork across the firm and more

motivation and higher morale. Women have also been shown to bring different perspectives and

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ideas to managerial decision making process. These levels of differential impact range from their

own life experiences, creativity, decision-making styles, and problem solving skills. Along with

these perspectives, women in management are able to relate to female consumers, trading

partners, and employees in a way their male counterparts are not able to (Daily, Certo, & Dalton,

1999). An increase in available information will lead to better decision-making among

management (Wiersema & Bantel, 1992).

Another result of diversity within a firm is increased availability of talents and enhanced

innovation. Through literature review, it has been concluded that an increase in diversity within

a firm will lead to a better-developed talent pool for the company. Through incentives and

encouragement, women in management positions have shown to concentrate on developing and

mentoring their subordinates more than their male counterparts (Eagly, Johannesen-Schmidt, &

Van Engen, 2003). The presence of women in upper management have shown that women in all

levels of the firm are motivated and committed to the firm due to the fact that they believe their

firm is committed to their personal advancement within the organization (Bilimoria, 2006). An

increase in motivation has been linked to a greater level in creativity and productivity. An

increase in motivation has also shown to increase in the sharing of information within a firm that

facilitates a more creative workplace. Firms that have a creative workplace have led to a more

innovative firm. Innovation is a result of an increase in the number of perspectives being shared

within all levels of management. (Ginsberg, 1994). An increase in motivation has a favorable

impact on productivity, which in turn results in a positive effect on future cash flow expectations.

The literature review also revealed that as a result of prevailing discrimination in the

labor market the female candidate selected as CEO is required to have better track record of

professional experiences, superior performance, and incremental possession of talent and skills

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set in order to compete with their male counterparts. These characteristics have a positive impact

on the cash flow expectations for the firm. In a study of 786 women in key management

positions in the Fortune 1000, ninety-nine percent of the women reported that it was considered

important to prove their ability to outperform the discrimination of the labor market. The

sampled women reported in a follow-up interview that as a result of their ability to work hard

and develop unique skills they were able to separate themselves from their male counterparts

(Ragins, Mattis, &Townsend, 1998). As a result of increased discrimination in the labor market,

females in key management positions are required to have better-established experiences,

perspectives, and talents to compete with their male counterparts for the CEO position.

3. Data and empirical approach

The sample consists of 36 females that have been selected as a CEO from March 5, 1995

until October 8, 2014. This sample consists of publicly traded companies within the Fortune

1000 with a functional executive structure. This sample is evaluated through several categories,

such as: the announcement date, age at the announcement date, prior firm, and if the newly hired

woman CEO succeeded a male. The announcement date is the date that the Wall Street Journal,

New York Times or the hiring firm released a press release reporting the announcement of the

hiring of the female CEO used in the sample. The age of the female CEO on the date of

announcement is calculated through analyzing values obtained through research. The prior firm

was included in the information reported by the Wall Street Journal, New York Times or the press

release by the hiring firm. The selected female CEO had to be with the hiring firm for at least

one year prior to the announcement to be included as their prior firm. The CEO that the female

CEO was succeeding was included in the information released by the Wall Street Journal, New

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York Times or the press release by the hiring firm. This information was copied into a spreadsheet

to analyze.

The empirical approach to determine the effect of hiring a female CEO on the future cash

flow expectations is to measure the stock prices of each hiring firm during a twenty-one day

window surrounding the announcement. This window consists of five days before the

announcement, the day of announcement, and fifteen days following the announcement. This

data will be gathered and analyzed to determine if there is an abnormal increase or decrease in

the stock price of the firm surrounding the announcement of hiring a female CEO. A stable beta

will be used, assuming the market condition will have no impact on the firm. Data was gathered

five days prior to the announcement to capture the effect that insider information would have on

the expectations of future cash flows.

The first step in the study is to compute the expected value using the Capital Asset

Pricing Model. In this study, the expected value is the value of the firm’s stock based on the

market index.

represents the expected value of the firm’s stock. represents the interest rate of a

risk-free asset. In this study, the interest of treasury bills during the twenty-one day window was

used in the calculation. represents the Beta of the firm. Beta is the measure of the stock’s

volatility in relation the market. represents the return on the market index. In this study, the

S&P 500 was used as the market index.

The next step in the study is to find the daily return of the share of the firm and market

index. The S&P 500 was used as the market index. The daily return was recorded by find the

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value of the stock at close and subtracting it from the close value of the previous business day.

This value was then divided by the close value of the previous day to calculate percent change.

represents the percent change between the closing value of the firm on the current

day and the previous closing value of the firm on the previous day. represents the closing

value of the firm on the current day. represents the closing value of the firm on the previous

day.

The next step is analyzing the percent change of the firm and market index. The abnormal

return is the difference in percent change of the firm and market index.

represents the daily abnormal return of the firm’s stock. represents the daily

return of the firm’s stock. represents the daily return of the market index. This study uses the

S&P 500 as the market index.

The final step is to calculate the average return of the firm during the twenty-one day

time window surrounding the announcement. This is calculated by adding the daily abnormal

returns of all of the firm’s stock values in the sample and dividing out the number of firms in the

sample.

represents the sublimation of the daily abnormal returns of the firm’s stock values

in the sample. represents the number of firms in the sample.

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4. Empirical Results

A one tailed t-test was performed to determine the announcement effect of selecting female

CEOs on corporate valuation. The calculated t-value was -1.94 and the critical t-value was -1.69.

The critical t-value was determined using the degrees of freedom of 35.

H0: AAR ≤ 0 Negative or No Announcement Effect

H1: AAR > 0 Positive Announcement Effect

α = 5% (95% Confidence Level)

Calculated t-Value - 1.94

Critical t-Value - 1.69

Failed to Reject the Null Hypothesis since t-critical - 1.69 > t-calculated - 1.94 at 5%

Significance Level.

Conclusion

In this study, daily stock returns were observed of thirty-six Fortune1000 firms who announced

the hiring of a female CEO. Event study methodology was implemented to examine stock price

reactions five days prior and fifteen days after the announcement of the selection of a female

CEO. The results show that during the studied event window, which is defined as five days

prior to the announcement date and 15 days following the announcement date, the selection of

a female CEO has a negative impact on the valuation of firm. The data failed to support the

initial premise of this study that selection of a female CEO will have positive market impact.

This finding is problematic if the “Corporate America” is expressing a doubt on the capability of

a female to serve in the capacity of CEO. There are several major limitations of the

methodology used in this study. The limitations include the assumption of constant beta which

may be shifting with changing economic environment and unforeseen factors in the valuation of

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a firm that cannot be quantitatively described. A future direction of this paper could be an

analysis of differential industry impact on corporate valuation due to the announcement of a

female CEO.

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References

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Graham, K. (1998). Personal history. New York: Vintage.

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Capital Market. Leeds University Business School. Retrieved February 3, 2015.

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Appendix

General Motors

Mylan Incorporated

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Xerox Corporation

Reynolds American Corporation

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Oracle Corporation

Duke Energy Corporation

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Lockheed Martin Corporation

E.I. du Pont de Nemours & Company

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HCP Incorporated

Gannett Company Incorporated

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Yahoo Incorporated

Avon Products Incorporated

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KeyCorp

Campbell Soup Company

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PepsiCo Incorporated

General Dynamics Corporation

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Sempra Energy Corporation

Ross Stores Incorporated

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International Business Machines

Hewlett-Packard Corporation

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Yahoo Incorporated

TJX Companies Incorporated

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Ingredion

Advanced Micro Devices

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Archer Daniels Midland Company

Wlliams-Sonomia

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Annaly Capital Management

Oil States Internationally

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Alliant Energy Corporation

Hawaiian Electric

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Regal Entertainment

American Water Works

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Ultra Salon

Cracker Barrel

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Brown Shoe Company

Benchmark Electronics