Shhh… Do Gender-Diverse Boards Prioritize Product Market Concerns Over Capital Market Incentives?

Abstract

We examine whether gender-diverse boards prioritize product market concerns over capital market incentives when proprietary costs are high. We argue that gender-diverse boards protect their firm’s competitive edge and maximize long-term shareholder wealth by ethically and carefully maintaining the confidentiality of proprietary information. Due to the reduced disclosure of proprietary information, firms with gender-diverse boards are likely to face more adverse selection when proprietary costs are high. However, the reduced disclosure of proprietary information enables firms with gender-diverse boards to enhance and maintain their competitive edge and gain higher long-term returns. Using a matched sample of the United States-listed companies, we find that firms with gender-diverse boards, relative to similar firms with all-male boards, (1) are associated with higher adverse selection costs and (2) higher long-run stock returns when the firm faces high product market competition. Collectively, our results suggest that firms with gender-diverse boards, which initially experience higher adverse selection in a competitive environment, are rewarded with a net gain of about 10 percent of their stock price in three years. Our research contributes to the literature by highlighting the importance of board gender diversity in fostering the ethical redaction of proprietary information for proprietary cost-based motives as opposed to agency cost-based motives. Our findings have important implications for regulators, firms, and shareholders by identifying gender-diverse boards as an antecedent for the ethical redaction of proprietary information.