Fem Firm Finance

In a Post OpEd, Katty Kay and Claire Shipman try to persuade firms to hire more female exces, because many studies show that female led firms are hugely profitable compared to male led firms.  Kay and Shipman, however, never mention that anyone who believed this result should expect to make big profits just by buying female firms and selling male firms.

If many stock speculators believed Kay and Shipman, firm stock prices would jump upon hiring more female execs, making most CEOS quite eager to hire more women execs.  There would be a boom in female execs and Kay and Shipman would not have bothered to write their oped.  Since that didn’t happen, I’ve gotta believe most speculators don’t believe those studies, and so I shouldn’t believe them either.  If you think otherwise, go speculate.  That OpEd:

The sexy new discussion in policy circles around the world, thanks to the recession, is whether a significant shift of power from men to women is underway — or whether it should be.  Accounting giant Ernst & Young pulled out charts and graphs at a recent power lunch in Washington with female lawmakers to argue a provocative bottom line: Companies with more women in senior management roles make more money. …

And it’s not only one study, but at least half a dozen, from a broad spectrum of organizations such as Columbia University, McKinsey & Co., Goldman Sachs and Pepperdine University, that document a clear relationship between women in senior management and corporate financial success. By all measures, more women in your company means better performance.

Pepperdine found that the Fortune 500 firms with the best records of putting women at the top were 18 to 69 percent more profitable than the median companies in their industries. McKinsey looked at the top-listed European companies and found that greater gender diversity in management led to higher-than-average stock performance.

Is there a magic number of women? In some cases, it’s just three. Catalyst, a research firm focused on women and business, found that Fortune 500 companies with three or more women in senior management positions score higher on top measures of organizational excellence. In addition, companies with three or more women on their boards outperformed the competition on all measures by at least 40 percent.

It’s time to admit the obvious. …  Research broadly finds that testosterone can make men more prone to competition and risk-taking. Women, on the other hand, seem to be wired for collaboration, caution and long-term results.

According to a 30-year study of fund managers released last month by the National Council for Research on Women, female investors and professional money managers used more measured strategies. They didn’t take huge risks, but they also didn’t lose big. Their returns were consistent. Men took larger risks and wound up with results that varied more widely. A study by the French Fund association found that funds managed by women had more consistent results over one-year, three-year and five-year measurements. Female-managed funds weren’t usually top performers, but they were never at the bottom. …

Corporate America, take the first step toward economic recovery. Open your minds and offices to new ways of working and succeeding. Not because you are nice guys — but because it will help the economy and your bottom line.

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  • michael vassar

    I did back testing for this idea, found it to be valid at p<.05% on a 1, 3, and 5 year time frame, and looked for a way to capitalize on it years ago. In practice finance is, like most other industries, immensely uncompetitive.

  • michael vassar

    Sorry, should be 5%, or .05, not .05%.

    • I’m taking this to mean that there really is an advantage to investing in firms with high-level women executives, but investors are too rigid (probably your theory) or too prejudiced (a theory I’d include) to invest in a fund specializing in such firms. Am I correct?

      IIRC, your original theory was about firms headed by women. Is there a difference between those and firms which just have a significant number of high-level women exectutives?

    • So did you actually make superior (risk, cycle adjusted) returns investing this way?

  • Andrew

    At what stage in a company’s life cycle does this observation hold for? Risk aversion would not be the most suitable trait for many early-stage or high-growth venture but might be once that company plateaus.

    From an investor standpoint, having a strong bias toward males in senior management at mature companies may be a way of signaling growth potential. Having more females in senior management might be more efficient when maintaining a mature company, but is that what the majority of investors are looking for when they invest in a company? Would not the investors, of which I expect at least half are male in practice, have a bias toward growth companies as a population (particularly given the established lack of risk aversion when males invest)? The investor population may be selecting for companies that do not signal that they are playing it safe.

  • GN

    The most recent Journal of Economic Literature has a survey of gender differences found by behavioral economists. A large section is devoted to risk preferences, where most studies find that women are more risk averse than men. However, when looking only at MANAGERS, the gender difference in risk preference disappears. The self-selection (or firm selection) of the women into management have risk-preferences similar to men.

  • anon

    Andrew: Isn’t there a well-known distinction between “growth” and “value” companies? Anecdotally, people who invest in “value” stocks do seem to be more risk-averse. Note that the analysis is limited to Fortune 500 companies, which may be skewed towards value.

  • I suspect this has to do with what sectors of the economy have been growing lately, and what sectors haven’t been. This is a related phenomenon.

  • Granting that such a correlation exists, this isn’t sufficient to establish that hiring more female execs would result in increased performance.

    An example scenario: Assume some degree of minor, entrenched sexism is common at the executive level. Because of this, women are ceteris paribus, less likely to be found in such jobs. Assuming that, aside from gender, competence is the main trait being selected for in hiring decisions, this will result in a higher average performance for female execs due to low-competence female execs not getting hired at all.

    In a situation like this hypothetical, hiring more female execs would only serve to reduce the observed correlation.

    • My thought exactly, although I wonder how much that was primed by reading the latest Marginal Revolution post. Or discussions about European labor efficiency.

      In a situation like this hypothetical, hiring more female execs would only serve to reduce the observed correlation.

      But until the observed correlation is zero, you are still getting a great return if you can shave off the bottom of your male executive list and draw from the top of the female list. Losing even an average male will be a step up if there is an untapped pool of female potential.

      • Yes, but since my scenario assumes the other main selection criteria is competence, your ideal return is if you simply disregard gender entirely and hire based on competence. Deliberately hiring women would be just addding counter-noise, and strictly suboptimal vs. hiring for the desired characteristic (interesting note: does the calculation change if you believe yourself less accurate at judging competence than the average?).

        Note that this also largely explains the inability to trade effectively on the knowledge, or to change share price with it–if investors are looking at competence, not gender, the correlated benefits of female execs are already taken into account, and hiring less competent female execs won’t accomplish anything.

        The main benefit would be reduced competition for recruiting competent female execs vs. competent males.

    • Hal Finney

      Or another correlation scenario would be that companies flexible or unprejudiced enough to hire women already have superior management which will manifest in a variety of ways. Telling companies to improve performance by hiring women would be as pointless as telling adults to get taller by eating more.

  • Mike

    I had the same thought — if there is much sexism then more female execs might indicate higher average quality of execs.

    How does Robin know that firms like Goldman Sachs and others are not buying companies when they hire female execs and selling off when switch to more men. Could it be that GS performed the study as background to a trading strategy? Then again, why share? Maybe because they now know something more about what is going on, which would allow them to capitalize on others trading just on the information they’ve shared.

    • I had the same thought — if there is much sexism then more female execs might indicate higher average quality of execs.

      This actually generalizes well. Speaking purely anecdotally, I have observed the following, as a rule of thumb:

      If a given area has a substantial demographic skew for reasons not directly related to competence within that area, members of the minority demographic will have a higher average competence than members of the majority.

      Your mileage may vary.

  • Douglas Knight

    It makes more sense if you interpret it as addressed to the speculators, not the firms.

  • Psychohistorian

    I also suspect a solution is not legally feasible. I doubt these correlations would provide adequate evidence to discriminate explicitly in the hiring process, which seems to be what’s being advocated.

    More generally, you can’t just say, “We’ll put more women on our board,” you have to say “We’ll put this woman and that woman on the board, instead of that guy and this other one.” On an individual level, it is difficult to value in the advantages of having a greater percentage of women, particularly without explicitly discriminating.

    An alternative explanation is simply that more meritocratic hiring policies/decision makers will hire more women ceteris paribus, thus number of women serve as a proxy for hiring efficiency.

  • It is likely that the reason the article cites is wrong, even though the findings may be correct. If I had to hazard a guess, I would point to the problem of group think and the benefits of the wisdom of the crowd.

    If this guess is correct, then the benefits flow from having diversity in the top management and not from any particular traits of women (except for them being different from the males).

    Ref. Wisdom of the Crowds by Surowiecki

  • Mike

    The finding could also be based on a different less PC reason, if men were better execs than women, but women execs make a company look better then the companies who could afford to hire women would be the most profitable ones.

  • The article is pretty short on referneces – except where it comes to the male-female risk aversion difference, which is standard science.

    485 of the Fortune 500 companies are run by men, 15 are run by women


    From that, it seems as though taking risks is the way to win big.

  • Re: discriminate explicitly in the hiring process, which seems to be what’s being advocated.

    The article doesn’t propose sex discrimination during hiring. It proposes that businesses “stop the brain drain” – by rearranging work life, so it fits in better for women – allowing them to work from home more when they would otherwise be having monthly or maternity employment downtime. Such proposals may be unlikley to be heeded – but they would probably not violate sex discrimination laws.

  • Surely we need a control experiment? Say, suspend anti-discrimination legislation and let men opt to have male only workforces/management teams if the wish.

    Something F. Roger Devlin proposes in section 12 of his magnificent series Home Economics.

    Or would that not be fair?

  • Gary

    How about this for a simple model: women are riskier hires than men, only supra-male quality women get hired to compensate for the risk, many women blow up, and survivor bias drives the results we observe.

    Possible? michael vassar?

  • curious

    Since that didn’t happen, I’ve gotta believe most speculators don’t believe those studies, and so I shouldn’t believe them either.

    yup. because speculators are *never* influenced by cognitive biases against information they don’t like, right? right. and they’re always totally rational specimens of homo economicus, and they would *never* put on blinders to inconvenient findings that challenged their egos and worldviews. and speculators of all stripes have been making such brilliant decisions about the state of the world for the last few years. we should all think just like them.

  • Johan

    Well, look historically. Do you agree that there was a huge amount of discrimination against women by private companies?

    Yet, couldn’t the exact same argument have been used to argue that it didn’t occur and it was all rational hiring practices?