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Cambridge Endowment for Research in Finance (CERF)

 

PI: Raghavendra Rau

Board Gender Diversity and IPO Performance

Project Start Date: Mon, 01/02/2021

Project End Date: Thu, 01/12/2022

Project Abstract:

We study the relation between board gender diversity and initial public offering (IPO) price formation. We find that IPOs experience significantly greater underpricing when the firm’s board has at least one female director on it, relative to when no women sit on the board. The underpricing effect is not attributable to differences in profitability, growth opportunities, CSR profiles, CEO gender, director experience, or other firm, director, or underwriter characteristics. Instead, the underpricing effect appears to be driven by increased institutional investor demand for board gender diversity over the most recent decade. Board gender diversity does not impact the initial file price of the IPO or the offer price adjustment, suggesting that investment banks do not adjust their pricing models for gender diversity.

However, underwriters with greater network centrality appear to learn about investor preferences for board gender diversity, and eventually incorporate these preferences into IPO prices, reducing the underpricing effect.

Activities and Achievement:

In recent years, investors, regulators, and practitioners worldwide have demanded an increase in female representation on corporate boards. However, identifying the effects of board gender diversity on corporate outcomes is extremely difficult. Reverse causality concerns limit researchers from making causal claims regarding the effect of increased board diversity on firm value. In this paper, we provide an alternative approach to studying the effects of gender diversity on firm outcomes that is free from reverse causality concerns and that does not rely on board quota mandates.

Specifically, we examine the impact of board gender diversity on the underpricing of initial public offerings (IPOs).

 

IPO underpricing is likely to be less subject to the endogeneity problems that plague studies examining the relation between gender diversity and stock market or operating performance. While it may not be obvious whether board diversity causes performance or vice versa, it is implausible that the potential for underpricing during the going public process causes firms to diversify their boards. Similarly, it is implausible that a female director would choose to join a board because she expects its IPO shares to be underpriced, as this would mean she is choosing to join a firm that leaves more money on the table.

 

In our sample of over 1,100 U.S. IPOs from 2000–2018, we find that board gender diversity is positively related to underpricing on the issue date.

This effect is economically meaningful and statistically significant across the entire sample period. However, further analysis shows that this underpricing effect is almost entirely driven by IPOs in the most recent decade. From 2010–2018, gender-diverse board IPOs realized over 9 percentage points more underpricing than did non-diverse board IPOs. While most of the literature has attempted to establish a link between board gender diversity and profitability, our results are consistent with an alternative source of value creation: diversity lowers the cost of capital.

 

Dissemination: Submitted to RAST. Is currently on SSRN.

Outputs:

Valuing Soft Information: IPO Price Formation and Board Gender Diversity

 

We study the relation between board gender diversity and initial public offering (IPO) price formation. We find that IPOs experience significantly greater underpricing when the firm’s board has at least one female director on it, relative to when no women sit on the board. The underpricing effect is not attributable to differences in profitability, growth opportunities, CSR profiles, CEO gender, director experience, or other firm, director, or underwriter characteristics. Instead, the underpricing effect appears to be driven by increased institutional investor demand for board gender diversity over the most recent decade. Board gender diversity does not impact the initial file price of the IPO or the offer price adjustment, suggesting that investment banks do not adjust their pricing models for gender diversity.

However, underwriters with greater network centrality appear to learn about investor preferences for board gender diversity, and eventually incorporate these preferences into IPO prices, reducing the underpricing effect.

 

Weblink: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3783771

Major Difficulties and Any Other Issues: None Web Links: Weblink:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3783771

Optional - detailed findings and output:

https://www.cerf.cam.ac.uk/system/files/webform/rau_sandvik_vermaelen_-_board_diversity_and_ipo_performance_-_20220616.pdf

Additional Information:

Declaration: This award has not yet produced any relevant outputs, but details of any future publications will be submitted to the CERF database as soon as they become available.

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