Capital Markets

To Make Investors Happy, Hire a Woman as CFO?

New research suggests that certain actions by companies create more shareholder value when a woman, not a man, is at the finance helm.
David McCannFebruary 9, 2009

What are the ideal qualities a company should look for in a CFO candidate? A born leader with high integrity and sharp vision, who is technically meticulous and can steadily navigate the capital markets. Oh, yes, and the company might be better off if it chooses a woman.

Now, hang on, no one is saying that women make better CFOs than men — or vice versa.

But a new research study says investors appear to respond more favorably to certain financial moves by companies whose CFOs are women. The unpublished study, co-written by a Boston College assistant professor and a Ph.D. candidate at the school, purports to show that the stock market reacts more favorably to both acquisition announcements and secondary equity offerings made by companies whose finance function is run by women.

The professor, Darren Kisgen, told he believes his is among the first academic studies to explore the issue of corporate finance performance by gender. Until relatively recently, he noted, there were not enough women CFOs to create a statistically meaningful sample. In fact, Kisgen and his co-author, Jiekun Huang, were also interested in studying the differences between male and female CEOs, but there were far too few of the latter.

To perform their study, titled simply “Gender and Corporate Finance,” the researchers compiled a list of 73 large U.S. public companies at which women succeeded male CFOs between 1996 and 2002 and stayed in the job for at least four years. They compared various actions taken by those companies, and results of those actions, against a random sample ofabout 500 firms where a man succeeded a man.

One result was that over the three years following the year of the CFO’s hiring, the total growth in assets was 17 percent lower at the companies with women CFOs. That, plus various other tests performed, clearly showed that these companies made fewer acquisitions, according to Kisgen. (Technically, the measure used was not number of acquisitions, but total dollar amount of acquisitions as a percentage of assets.)

However, the evidence showed that the deals that did get made were of higher quality, at least in terms of investor response. Specifically, the stock-price reaction to acquisitions was approximately 2 percent better when women were running the finance department.

The authors also say women seemed to have an edge when it came to making secondary equity offerings. There, too, the market reaction was about 2 percent better for companies where a woman was in charge of finance.

Is a 2 percent difference for a 73-company sample significant? According to Kisgen, it is. Standard statistical tests, he said, showed that the finance and gender study had a statistical significance of 5 percent — or in other words, a 95 percent confidence level that the results were not the product of random distribution of events, but rather of the controlled variable (female versus male CFOs).

More importantly, when a large company (all of those in the studied samples had book assets greater than $500 million) gets a 2 percent better equity return on an acquisition or stock issuance, “we’re talking about a substantial amount of dollars,” Kisgen pointed out.

“The evidence suggests that female CFOs on average do make decisions which are better for overall shareholder value,” the authors of paper asserted. However, while they measured the share-price effects of acquisitions and secondary equity offerings, they did not gauge other elements of shareholder value such as earnings growth or dividends.

Men and women also appeared to have different approaches to capital structure, although neither provided a clear advantage in that area. Overall, female CFOs issued about 13 percent less debt over the three years following the year of hire. But that gap was nearly negated by the fact that women also retired less outstanding debt than their male counterparts, causing net leverage to be about equal. In any case, the research did not show a meaningful difference in investor reaction to debt decisions made by CFOs who are men and those who are women.

The research did not explore the reasons for the gender disparities, because, Kisgen said, “the psychology literature is rich with studies trying to identify differences in gender and why those differences might exist.” The authors felt that the narrow objective of their research, to see whether any gender-based differences exist in the market impact of specific corporate finance decisions, “would provide a significant contribution in its own right.”

The authors did, though, point to previously published studies that concluded women tend to be more risk-averse than men, while men tend to be over-confident. One potential interpretation, therefore, is that men make acquisitions and issue stock too readily as a result of over-confidence, whereas risk-averse women scrutinize potential deals more carefully and thus make fewer poor decisions.

“We don’t know what’s in investors’ minds, but it’s hard to come up with an alternate explanation,” said Kisgen. “The market seems to be taking something from the gender of the executive. I don’t know for sure what that is, but relying on previous literature it seems that the risk-aversion and over-confidence arguments are reasonable and consistent with what we find empirically.”

The study did not attempt to address whether stocks of companies with women CFOs outperform or underperform the market generally. So many variables affect stock prices over longer periods of time that being able to convincingly identify the specific effect of a female executive versus other explanations seems unlikely, Kisgen said.

The research did take into account, however, several factors that could have skewed the results. Control variables were used to remove from the data the effects of industry, company size, year of transition to CFO, profitability, and market-to-book ratio. For some tests, additional control variables were used; for example, for acquisition announcement returns, there was a control for whether a deal was friendly or hostile.

The authors acknowledged that hiring practices conceivably could have influenced the results of their study, though they drew no conclusions. They mentioned one study, done 52 years ago, that suggested that a pro-male hiring bias meant women who overcame that bias were of higher than average caliber. By contrast, they also alluded to a 1993 study that argued that affirmative action can lead companies to select employees whose qualifications are lower-than-average.

“We can’t completely rule out the argument that some unobserved change in discriminatory orientation … could explain our findings,” the authors wrote, meaning that some unrecognized hiring trend could have skewed their results.

But they also found that to be very unlikely. The study not only used a control group of male-to-male CFO transitions, it also compared the performance of companies with female CFOs with the performance of those same companies when they had male CFOs. That would seem to nullify company-specific aberrations that might have affected the research results.

Meanwhile, even if women are better at maximizing shareholder value, they have some challenges to overcome in getting to the CFO seat. In a June 2006 survey of 363 executives by CFO magazine, 83 percent of men said there was no glass ceiling for women in corporate finance — but only 44 percent of women agreed.

Also, 51 percent of men said that no positions would be harder for a woman to obtain, an assertion with which only 37 percent of women agreed. About 14 percent of survey respondents said CFO is the hardest corporate job for women to reach.