Media attention drives market bias toward new female CEOs

A new study from the Kellogg School of Management at Northwestern University found that significant media attention to the appointment of a female CEO in a U.S. publicly traded firm causes its stock to drop by 2 to 3% after the announcement, but the researchers said that this short-term market reaction reverses course over time. 

The study, “Better in the Shadows? Public Attention, Media Coverage, and Market Reactions to Female CEO Announcements,” was published recently in the journal Sociological Science.

The study analyzed media coverage of all CEO appointments for U.S. publicly traded firms between 2000 and 2016 and looked at approximately 17,000 media outlets. The authors tracked market reaction, the gender of the CEO and the amount of media coverage.

The issue of market bias against newly appointed female CEOs is well-documented, and previous studies have suggested that gender bias is the reason. This study, however, suggests a different dynamic at play than mere individual prejudice.

The authors said that investors may be attempting to take into account the likely reaction of other investors, assuming them to be collectively more prejudiced toward women than they actually are. They call this “second-order sensemaking,” which relies on speculation made by other investors to interpret a firm’s value instead of one’s own perception of that firm. Since trader behavior determines financial returns, the authors argue that heightened public attention encourages investors to consider the likely choices of other investors and to calibrate accordingly.

Increased media coverage of the appointment, the authors found, tends to drive a limited, short-term market dip that does not occur with male appointees.

On the other hand, female CEO appointments that received little media attention gained an additional 1.5% abnormal return over the subsequent three trading days following the announcement. Over an even longer 25-day time period, abnormal returns among these same firms continued to rise to more than 6%. And over the long-run, market discounts for female CEO appointments whose media coverage ranked in the top quartile reversed course, suggesting that individual bias itself is not the animating force, according to the study.

“What’s frightening is that there’s ample research showing the stock market reaction when a public company appoints a female CEO and it has implications for her future job prospects, salary and how the market continues to interpret their appointment,” said Edward Smith, associate professor of management and organizations at Kellogg and co-author of the study. “If it is only speculation, then women leaders have great disadvantages right from the start.”

Jillian Chown, assistant professor of management and organizations at Kellogg and co-author of the study, added: “This is just another piece of evidence that the market penalty is most likely due to short-term speculation traders. Consistent with our opening puzzle, over a longer time horizon the market seems to be learning that women-run businesses are great investments.”

The researchers also found that female CEOs received 3.35 times more media coverage than male CEOs, on average, and tend to inherit firms that are both better performing and have a larger percentage of female board directors.

The findings are a cautionary tale for boards of directors and shareholders who could get rattled by short-term reactions in financial markets.

“The recent stock market craze that drove prices of GameStop, for example, shows how the market can be very wrong in the short term. Only in the long run is the market a reliable indicator of the value of any decision,” Smith said.