Gender equality in the boardroom The impact of quota legislation in Germany

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Gender equality in the boardroom

The impact of quota legislation in Germany

Keywords

Abstract

Gender diversity Corporate governance Event study Abnormal returns Market model Parametric test Gender quota Supervisory board Germany Board diversity

This paper investigates the impact of the implementation of the corporate gender quota in Germany. Abnormal returns on and around the rejection of the initial quota proposal and two announcements on the introduction of the quota are examined. The rejection caused a significant negative reaction on the stock market, which was more severe for firms with low female board representation. Announcements on the introduction resulted in significant positive abnormal returns, which were more pronounced for large firms. The results indicate that the quota is beneficial to German firms and that board gender diversity is value-enhancing, especially for large firms and firms with few female directors.

Rijksuniversiteit Groningen 2014-2015

Name: Lisa Fuhler

Student number: s2220318 Study program: MSc Finance

Other program: MSc International Financial Management

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1. Introduction

Despite the steady increase of female representation in leadership positions over the last couple of years, corporate boards remain largely male-dominated. In Europe gender equality is being promoted, but there are still several potential barriers for women trying to climb the corporate ladder. An important factor is motherhood. There are certain costs associated with managing work and family. Women are not adequately compensated for bearing these responsibilities (Stephenson, 2004). They demand shorter working hours and this leads to career disruptions. In addition, culture can play a role. Social norms and perceptions of women leadership style may be an impediment to female advancement (Adams & Kirchmaier, 2013). Moreover, certain preferences and psychological factors can be an obstacle. Women may not have the ambition or competitive drive of men, which makes them less likely to pursue high-profile careers (Stephenson, 2004). Finally, taste-based or statistical discrimination may be a reason for managers not to promote women. Women are often perceived as being less experienced than men, too risk-averse or conservative (Adams & Funk, 2012). Quota legislation is regarded as a powerful tool to overcome these types of discrimination and increase female representation on corporate boards (Adams & Kirchmaier, 2013; Allemand et al. 2014).

Since October 2010, when the European Commission first announced the possibility of legislative action to improve female representation on corporate boards, the issue of board gender diversity has received a lot of attention across Europe. In November 2013 the European Parliament voted for a proposed law by the European Commission to have a quota of at least 40 per cent of non-executive board seats occupied by the underrepresented sex by 2020 for listed companies, and by 2018 for listed public undertakings. Noncomplying companies could face exclusion from public procurement and partial exclusion from the award of funding from the European structural funds. Still member states in the European Council need to reach agreement on the draft law in order for it to be implemented in the European Union (European Commission, 2013).

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80% or more of one gender it is not obligatory to have each gender represented. Noncompliance initially leads to a warning, followed by the threat of fines. Ultimately noncompliance results in forced liquidation (Nygaard, 2011). In other countries, penalties vary from monetary sanctions to suspension of fees or subsidies paid by the government.

Germany followed suit only recently. In 2001 the German government already started to promote equal opportunities for women and men in the private sector by signing an agreement with German business associations. The call for a substantial increase in the proportion of women in leadership positions was emphasized by the coalition agreement between the Christian Democratic Union (CDU), Christian Social Union (CSU) and the Free Democratic Party (FDP) in 2009, which contained a step-by-step plan aimed to increase the proportion of female executive directors and female supervisory directors (Holst & Kirsch, 2012). The pressure of prospective European quota legislation and announced in 2010 and the subsequent announcement that initial steps towards establishing a gender quota for EU member states were underway in 2011 further pushed Germany towards undertaking its own measures to anticipate (Holst & Kirsch, 2015). In November 2011, North Rhine-Westphalia proposed a quota for women in executive and advisory boards in the Bundestag, the parliament of Germany. However, this bill and further motions were rejected (Holst & Kirsch, 2012). In 2013 only 4.4% of the executive directors and 15.1% of the supervisory directors of Germany’s 200 largest companies were female, compared to 3.0% and 11.9% in 2011, respectively (Holst & Kirsch, 2015). The slow progress resulted in calls for a statutory gender quota for corporate boards. In April 2013, a proposal by the Social Democrats (SPD) and the Green Party to impose a gender quota of 20% on supervisory boards from 2018 onwards, which would increase to 40% from 2023, was rejected in the Bundestag. However, the CDU, the CSU and the FDP promised to include a 30%-quota in their election manifesto. Seven months later, in November, The CDU and the SPD negotiated a gender quota that would require 30% of the supervisory boards to be occupied by women in 2020. In November 2014, a draft law that forces Germany’s leading listed companies to allocate 30% of the seats on supervisory boards to women from 2016 onward was agreed on by the coalition parties and subsequently, the law was passed by the German cabinet in December. The first chamber of Parliament officially passed the gender quota law (Frauenquote) on March 6, 2015.

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2013) and may fundamentally differ from female directors who were voluntarily appointed before the quota (Ahern & Dittmar, 2012). Since corporate gender quota legislation is a recent phenomenon, literature on its effects is scarce. There are a few scholarly papers that examine the impact of the Norwegian gender quota. Nygaard (2011) shows that firms with low information asymmetry and few female directors are significantly positively affected. He argues that suboptimal boards prior to the reform make it easier for a female director to transform her general expertise to a specific firm and become an effective member of the board. In contrast, Ahern & Dittmar (2012) find that the constraint imposed by the quota caused a significant decrease in the firms’ market value and a large decline in performance, measured by Tobin’s Q, over the following years. This is supported by Matsa & Miller (2013), who find that the short-run profitability of publicly listed firms in Norway declined. They state that the boards that originated due to the quota led to fewer workforce reductions and hence increased labor costs, which indicates that gender quotas can affect corporate strategy. Dale-Olsen et al. (2013) report that the effect of the Norwegian gender quota on firm performance, measured as the change in return on total assets (ROA) and the change in operating revenues and costs, is negligible. The second reason why this study is of interest, is that the German gender quota law has been introduced just recently, which means that there are no papers on this specific event yet. Third, the German context differs from the situation in Norway when the gender quota law was passed. Norway has a tradition of using quotas in gender equality policies (Borchorst, 1999). In addition, the labor force participation rate among women is quite high in comparison with other countries and women are on average well-educated. Norway’s political environment is characterized by a relatively friendly atmosphere between politicians and the public (Dale-Olsen et al. 2013). In Germany, many women stay home or work part-time, due to firmly entrenched traditions and social policies. In World War II women received medals for bearing four or more children. After the war the return to a wealthy state encouraged single-earner households (Winkler & Reynolds, 2013). Furthermore, for Norway the gender quota and its threat of forced liquidation came as a surprise (Nygaard, 2011). Because of the long debate on gender equality and various announcements on the gender quota, companies in Germany had some time to anticipate before the quota was made binding law.

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2. Literature review

2.1 Theoretical framework

The following paragraphs provide theory on the board of directors, board diversity, board gender diversity and their implications.

2.1.1 The board of directors

The board of directors has two main functions: direction and control. According to Petrovic (2008), these functions can be divided into four subtasks. The board provides strategic guidance, monitors the management to ensure that strategic objectives are achieved, reports to the shareholders and ensures compliance with the law. However, these tasks may differ per company. They are divided among different directors, depending on the board system. Generally, there are two types of boards: one-tier and two-tier systems. The first type consists of one board with executive and non-executive directors. The latter consists of a management board and a separate supervisory board. Advantages of a one-tier board are that executives receive more information sooner and that non-executives are more committed, as they are also responsible for the executives’ decisions on a daily basis. The hypothesized roles of executive and non-executive directors are slightly intertwined. The idea behind the dual system is that management is separated from control. By ensuring the independence of the two boards executives do not become too powerful (Aguilera, 2005). Theoretically, members of the supervisory board are chosen by the shareholders in the general meeting. They, in turn, elect the members of the management board. The supervisory board’s main task is to adequately monitor whether the management board runs the company well (Jungmann, 2006).

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2.1.2 Board diversity

The effect of board diversity can be described from different perspectives. According to agency theory, the monitoring function of the board is considered most important. Its main task is to resolve conflicts between managers and shareholders. Managers may pursue objectives attractive to them which result in short-term gains, whereas shareholders want long-term firm value to me maximized. The board should set compensation and replace managers that do not act in the shareholders’ best interests. The agency view assumes that supervisory directors aim to build reputations as expert monitors and hence, they will not collude with inside directors (Carter et al. 2003). To effectively fulfill the monitoring role, a supervisory board should include enough independent members. People with a different gender, ethnicity or cultural background are hypothesized to be the ultimate outsider. Therefore, diversity brings more independence to the supervisory board, which enhances its ability to control and monitor managers (Campbell & Minguez Vera, 2010).

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company will be better able to serve and retain its market (Brammer et al. 2007; Carter et al. 2003; Singh & Vinnicombe, 2004).

However, board diversity can also have negative implications for decision making processes. Kanter (1977) argues that, because social similarity breeds trust, homogeneous boards cooperate more closely. They are more likely to share the same opinions. Directors in a diverse board may find it difficult to identify with directors with different backgrounds, which leads to disagreement over strongly held preferences and beliefs (Glick et al. 1993). Hence, diversity can result in decreased communication, more conflicts and less effective decision-making (Miller et al. 1998). This brings costs, as more interactions between board members are required in which they learn to understand the perspectives of dissenting directors (Eisenhardt et al. 1997). It restricts the board in its ability to take timely strategic action (Goodstein et al. 1994), as additional time is needed to resolve disagreements (Adams & Ferreira, 2004). This could particularly be an issue in highly competitive environments, where the ability to react rapidly to market changes is essential (Rodríguez-Domínguez et al. 2012).

2.1.3 Board gender diversity

All points on board diversity are also applicable to board gender diversity, but for gender some additional, more specific points can be made. Women are expected to bring more independence to the board. They are more inclined to ask questions that would not be asked by male directors (Carter et al. 2003). They do not belong to the old boys’ networks, which means they are able to think independently and hence, they tend to have better monitoring ability (Adams & Ferreira, 2009; Adams et al. 2011). In terms of legitimacy, by appointing female directors the reputation and credibility of a company may improve, as society puts pressure on firms to include women in their boards (Elgart, 1983; Hillman et

al. 2007). Furthermore, firms with female directors send a powerful message to women who already

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2.2 Empirical research

The following paragraphs offer a range of relevant empirical research on director gender differences, the link between gender diversity and firm performance and the market reaction to female director appointments.

2.2.1 Director gender differences

Theoretically, women are hypothesized to be the ultimate outsider and therefore, have better monitoring ability (see e.g. Adams & Ferreira, 2009; Adams et al. 2011). This is supported in empirical research. Several female characteristics can be observed that strengthen the monitoring function of the board. Adams & Ferreira (2009) show that female directors have better attendance records than their male counterparts and that male directors have fewer attendance problems the more gender diverse the board is. In addition, the number of board meetings that are held is positively related to the proportion of female directors (Adams & Ferreira, 2004). In their monitoring function, women directors are expected to protect the shareholders’ interests. Research demonstrates that men exhibit relative overconfidence in corporate decision making. The proportion of male directors is significantly positively associated with the firms’ acquisitiveness and the size of the bid premiums in acquisitions (Levi et al. 2014). Men are more likely to execute value-destroying acquisitions and they also issue more debt than female directors (Huang & Kisgen, 2013). In contrast, gender diverse boards exhibit more conservative behavior compared to the behavior of all-male teams (Baixauli-Soler et al. 2015). Firms face less variability in their stock returns as the proportion of women on their boards increases, which indicates that female directors are more risk averse (Adams & Ferreira, 2004; Martin et al. 2009). Since female directors have relatively lower overconfidence than their male equivalents, they are less likely to destroy shareholder value (Huang & Kisgen, 2013; Levi et al. 2014). This can be observed from the fact that investors react more favorably to corporate financial decisions made by firms with female executive directors (Huang & Kisgen, 2013).

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2.2.2 Gender diversity and firm performance

Some studies show there is a positive relationship between female board representation and the performance of the firm. Rodríguez-Domínguez et al. (2012) demonstrate that the performance female directors achieve depends on the business context. They are most operative in sectors traditionally dominated by males that provide favorable environments towards women, because this encourages greater freedom. Their validity and exclusiveness lead to an increase in corporate performance. In addition, boards should be balanced in terms of gender. This allows individuals to balance their need for belonging to a specific group and, at the same time, maintain their own differentiating features. In this way the highest advantages stemming from gender diversity can be obtained (Nguyen et al. 2014; Rodríguez-Domínguez et al. 2012). Lückerath-Rovers (2013) investigated Dutch companies and shows that firms with women directors perform better than firms without women on their boards. Campbell & Minguez Vera (2010) demonstrate that female board appointments in Spain are positively associated with firm value over a sustained period. Carter et al. (2003) also find that women tend to serve on better performing firms. However, these studies do not suggest causality and therefore they should not be used as an argument for appointing more women to a board (Lückerath-Rovers, 2013).

Other studies show that more female directors are associated with lower firm performance. Ryan & Haslam (2005) find evidence that women are actually appointed when a firm has been performing badly during a certain period. This poor performance could be a trigger for appointing women to the board, which makes their positions more precarious. They call this phenomenon the ‘glass cliff’, as there is an increased risk of negative consequences because of the riskier role a female director has to fulfill. Research demonstrates that women on boards do not seem to generate significant excess returns. They manage to keep up with normal stock market returns. However, given the ‘glass cliff’ hypothesis, this might mean that female directors outperform male directors, because they may be given less promising positions to start with (Francoeur et al. 2008). Adams & Ferreira (2009) state that the nature of the relationship between gender diversity and firm performance is contingent upon whether a firm has strong or weak governance. Adding more women to the boardroom of a well-governed firm is likely to cause excessive monitoring, which may ultimately reduce shareholder value.

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2.2.3 Market reaction to female director appointments

Market reactions show how the news of a new female appointee is received. They are indicators of perceptions and expectations of investors. Many studies demonstrate that female directors are welcomed by the market. Campbell & Minguez Vera (2010) investigated stock market reactions to female director appointments to companies in Spain. Spanish firms had very low female representation on boards relative to other countries at that time and they faced legislative pressure to increase female participation. Spain did not implement a mandatory quota, but it set a voluntary quota of 40%. Companies that complied with this quota were granted preferential access to public contracts. This explains why the appointments of female directors resulted in a positive and significant reaction for 2-day cumulative abnormal returns. Kang et al. (2010) also find a positive and significant stock market reaction for firms in Singapore. They state that this is caused by investor awareness of the potential benefits of a gender diverse board. In particular, investors perceive female appointees as a signal that workforce diversity is welcomed, which is a source of competitive advantage for firms. The studies by Campbell & Minguez Vera (2010) and Kang et al. (2010) suggest that investors on average believe that female directors add value. Adams et al. (2011) find, on average, a significant positive reaction, which is approximately 2% higher than the reaction on a male appointee, even after controlling for other characteristics. This suggests that director gender matters. Martin et al. (2009) detect positive and significant 3-day cumulative abnormal returns after a female CEO appointment, but also after a male CEO appointment. The difference between these returns is not significant, which suggests gender is not an issue. Farrell & Hersch (2005) do not document significant abnormal returns, which means they cannot validate that gender diversity is a value-enhancing strategy.

2.3 Gender quota in Germany

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employees, half of the supervisory board should be occupied by shareholder representatives and the other half by employee representatives. A director cannot be member of the management board and supervisory board simultaneously (Jungmann, 2006).

The gender quota in Germany, which was officially passed by the first chamber of Parliament on March 6, 2015, applies to all corporations that are both listed (börsennotiert) and that act under full codetermination (voll mitbestimmt), which means they have at least 2,000 German employees, and for which the German legislative authority has legislative competence. It covers 101 Aktiengesellschafts (AGs). After the first draft of the quota law, seven Societas Europaeas (SEs) were included that are listed and that show equal codetermination in their supervisory boards (Lasse & Weckes, 2014). SEs are a type of public limited-liability companies that are regulated under EU law. They can choose whether they employ a one-tier board or a two-tier board system (Jungmann, 2006). The seven SEs that were added are comprised of a management board and a supervisory board. A list of these companies is presented in Table A1 (see Appendix A). Approximately 3,500 other medium-sized companies will be left to determine their own quota for executive and supervisory board positions, but without sanctions. The quota law only applies to non-executive directors. It is expected that increasing female representation on supervisory boards will eventually have a positive influence on the number of women on executive boards. The companies that mandatorily have to comply with the German gender quota have supervisory boards that consist of 12, 16 or 20 members. Half of the seats is occupied by shareholder representatives and the other half is occupied by employee representatives. The quota law requires both sides to have at least 30% female representation. For a supervisory board with 12 members this means that it should have at least two female shareholder representatives and at least two employee representatives. A supervisory board with 16 directors should have at least three female representatives on both sides. This also applies to a supervisory board with 20 members: the number of female shareholder representatives and the number of female employee representatives should be three or more (Lasse & Weckes, 2014).

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3. Hypothesis development

Hypotheses are developed based on theory and empirical research. The hypotheses in this paper concern the market reaction to gender quota announcements in Germany, the effect of pre-quota female presence and the effect of company size. In addition, some other factors and control variables will be taken into consideration. The hypotheses are based on positive announcements1_{. For the rejection of the quota}

proposal converse market reactions are expected.

3.1 Market reaction

Literature on how firm performance is affected by female directors is inconclusive. Some papers find a positive relationship (see e.g. Campbell & Minguez Vera, 2010), although others find that the proportion of female directors is associated with worse firm performance (see e.g. Adams & Ferreira, 2009), while alternative research shows no significant relation (see e.g. Carter et al. 2010). Furthermore, female directors can add value to the board (e.g. better monitoring), whereas they can also destroy value (e.g. excessive monitoring). Even though there is evidence that their board appointments are appreciated more than male director appointments (see e.g. Campbell & Minguez Vera, 2010), other research cannot validate that gender matters (see e.g. Farrell & Hersch, 2005). So, ex ante, it is not clear whether the prospect of having to appoint women to firms’ boards will lead to a positive or a negative reaction on the stock market.

The quota law offers a convenient natural experiment, in which the impact of forced increases in board gender diversity can be investigated. Gender quota legislation has two distinct ethical aspects. Before the enactment women may be underrepresented on boards, despite that they are just as competent as their male equivalents, or even better applicants. In the post-quota situation women may be appointed to board positions, even when they are not the most qualified candidates (Terjesen et al. 2013). Furthermore, firms have to make certain costs in their quest to find the best possible female director. In publicly-traded companies these costs are borne by shareholders (Adams et al. 2011). Because stock prices theoretically reflect all available information, stock price reactions are good indicators of whether the quota is value-enhancing or value-reducing. Positive abnormal returns signal that quota announcements are deemed positive news. This means that one thinks that the quota will be beneficial

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to the value of firms. Negative abnormal returns can be associated with negative expectations. Investors might think that gender quota legislation will entail more costs than benefits. Previous research on the Norwegian gender quota demonstrates that firms may be positively affected by a quota (see e.g. Nygaard, 2011), whereas there is also evidence that the quota resulted in lower market values and declines in firms’ performance (see e.g. Ahern & Dittmar, 2012). Other studies report no significant effect (see e.g. Dale-Olsen et al. 2013). As there is no consensus on the effect of mandatorily having to appoint female directors to comply with a gender quota, a dual hypothesis will be tested:

Hypothesis 1

a. Announcements on the introduction of the gender quota result in significant positive abnormal returns for German listed companies.

b. Announcements on the introduction of the gender quota result in significant negative abnormal returns for German listed companies.

3.2 The effect of pre-quota female presence

The number of female directors in the supervisory board before the quota may influence the impact of the announcements on the gender quota. When hypothesis 1a is accepted, one could argue that gender diversity is value-enhancing. Women directors are hypothesized to bring more benefits than costs to the boardroom. As a consequence, it may be expected that firms with a small number of female directors experience larger abnormal returns than firms with high female board representation. These companies may be positively affected, as they have suboptimal boards prior to the implementation of the gender quota (Nygaard, 2011). However, one could also argue that firms with more female directors have less costs and therefore higher abnormal returns. The gender diversity on a board is related to the likelihood of the appointment of a female director, which suggests that female directors prefer to serve on boards that already contain female directors (Farrell & Hersch, 2005). In addition, a board with incumbent female members may make it easier for a woman to enter and have an impact on the board, as male directors in the board already have accustomed to cooperating with female directors (Adams et al. 2011). Therefore, given the acceptance of hypothesis 1a, the following dual hypothesis will be tested:

Hypothesis 2

Given that the gender quota is value-enhancing:

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When hypothesis 1b is accepted, board gender diversity entails more costs than benefits. These costs can expected to be larger for companies that have few women on their boards. They face a more severe constraint than firms that have high female board representation (Ahern & Dittmar, 2012) and have to incur more adjustment costs to find suitable female candidates. Because of the additional costs, it is expected that companies with low female presence on their boards will exhibit lower abnormal returns than firms that already have a larger proportion of female directors. However, one could also argue that the quota is harmful to companies with relatively more female directors. Evidence suggests that the marginal positive effect of gender diversity ceases at a certain breakpoint (Nguyen et al. 2014). If the board already comprises the optimum number of women, being forced to add more will be value-reducing. Therefore, one could expect that the potential costs of the quota are larger for organizations with higher female board representation. So, given the acceptance of hypothesis 1b, the following dual hypothesis will be tested:

Hypothesis 3

Given that the gender quota is value-reducing:

a. The smaller the proportion of women on the board before the quota, the smaller the abnormal returns of German listed companies after an announcement on the introduction of the gender quota. b. The larger the proportion of women on the board before the quota, the smaller the abnormal returns of German listed companies after an announcement on the introduction of the gender quota.

3.3 The effect of firm size

In literature it is argued that large firm sizes give rise to more agency problems (Lehn et al. 2009). Due to their wider scope and more complex form of operations, more monitoring is required. There is a greater need for outside directors. Women are expected to bring more independence to the board, as they are more inclined to ask questions that would not be asked by male directors (Carter et al. 2003) and because they do not belong to the old boys’ networks (Adams & Ferreira, 2009; Adams et al. 2011). Furthermore, large firms have more stakeholders. Appointing female directors may be value-enhancing, as they help resolve conflicts with stakeholders (Adams et al. 2011). They may be a significant link between the company and its customers or important suppliers (Hillman et al. 2007), or its female employees (Adams et al. 2011). Therefore, large firms are expected to exhibit higher abnormal returns after an announcement on the introduction of the gender quota:

Hypothesis 4

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However, having too many female directors may lead to excessive monitoring, which is detrimental for well-governed firms (Adams & Ferreira, 2009). It may ultimately result in a reduction of

shareholder value. If boards are already chosen to maximize shareholder value, the constraint imposed by the gender quota will be value-reducing (Ahern & Dittmar, 2012). Therefore, the following

hypothesis will also be tested: Hypothesis 5

Announcements on the introduction of the gender quota will lead to lower abnormal returns for large firms than for small firms.

3.4 Additional factors

Some additional factors that may influence the impact of the gender quota will be examined. The companies concerned are covered by the codetermination act, which means that half of the supervisory board is made up of employee representatives and the other half consists of shareholder representatives. The employee representatives’ seats are divided between company employees and candidates proposed by the trade unions represented in the firm. The company’s workforce elects these directors, directly or indirectly (Schulten & Zagelmeyer, 1998). The shareholder representatives are elected at the annual general meeting of shareholders. The chairman, who also acts as a representative of the shareholders, has the casting vote in case of a deadlock. As half of the supervisory board protects the interests of the firms’ employees and the other half protects the shareholders’ interests, one might expect that adding a female director on one side may have a different impact than increasing female representation on the other side. Therefore, the proportion of female shareholder representatives on the shareholder side and the proportion of female employee representatives at the employee side of the supervisory board will be used as variables explaining the abnormal returns.2_{There is no specific expectation on this matter.}

Furthermore, whether a company has female presence on their executive board could have an effect. A female director in the management board could signal that women’s contributions are valuable and that there are career opportunities, which makes it less difficult for companies to attract more female talent (Robinson & Dechant, 1997; Stephenson, 2004). She could have a formal network with potential female directors to introduce to the company. These attributes decrease the costs of finding suitable female candidates to comply with the gender quota, and therefore, it is assumed that the coefficient on female presence on the executive board is positive. The size of the supervisory board is also included in the analysis, as a larger board requires a larger number of female directors to comply with the quota. This

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4. Data & methodology

4.1 Data

In the following paragraphs data requirements and its collection method are clarified. In addition, an analysis of the descriptive statistics of the data is provided.

4.1.1 Data collection

The exact announcement dates are determined using LexisNexis and they are checked by looking for newspaper articles on search engine Google. The first event that will be examined took place on April 18, 2013. On that day a proposal to impose a gender quota of 20% on supervisory boards from 2018 onward, which would eventually rise to 40% from 2023 onward, was rejected in the Bundestag. However, The CDU, the CSU and the FDP promised to include a 30%-quota in their election manifesto. On November 18, 2013 the Christian Democrats and the Social Democrats negotiated a gender quota that would require at least 30% of the supervisory boards to be occupied by women by 2020. A year later, on November 25, 2014, the coalition parties agreed on to the draft law that forces Germany’s leading listed companies to allocate 30% of the seats on non-executive boards to women from 2016 onward. On December 11, 2014 the law was passed by the German cabinet, but this event date will not be examined as it is too close to the date of the coalition’s agreement on to the draft law. The first chamber of Parliament passed the law on March 6, 2015.

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Besides the 108 corporations that mandatorily have to comply with the German gender quota, approximately 50 big companies and 50 small companies that do not need to satisfy the gender quota on a mandatory basis are examined to provide a broad picture of the effect of the quota on the German market. According to the quota law, the 50 big companies have to determine their own quota for executive and supervisory board positions, but without sanctions. They are not included in the mandatory group because they do not show equal codetermination in their supervisory boards. A reaction similar to that of the firms that mandatorily have to comply may be expected, but probably with a smaller magnitude. The 50 small companies are not subject to any new legislation. Therefore, no significant reaction is expected. The results of these analyses serve as a robustness check. They are used to validate whether the abnormal returns experienced by the mandatory firms are caused by the announcements on the gender quota and not by other events. If this is the case, at least the difference between the abnormal returns of the mandatory firms and the voluntary small firms should differ significantly. Companies are selected from the Frankfurt Stock Exchange. They are ranked based on their total assets. Big firms are selected starting from the top and small firms are selected starting from the bottom. If it becomes apparent from an annual report that the company does not have a two-tier board system, the firm is excluded and a new one is selected, as the quota only applies to firms with separate management and supervisory boards. The quota announcements that are investigated took place in 2011, 2013 and 2014, so stock returns and the market index covering the period 2010 until 2014 are required. As the market index the Morgan Stanley Capital International (MSCI) World index is used. A European index, like Euro Stoxx 50, is not chosen intentionally, as one-third of it consists of German companies and the rest consists of other corporations of countries in the Eurozone (Stoxx, 2015). These corporations may also have been affected by the announcements and this can cause failure in capturing the abnormal returns. The market returns are used to calculate the returns that would be expected if no announcements on the gender quota were made, so the possible impact of the quota legislation in Germany on the benchmark should be reduced to a minimum. The MSCI World index is believed to be a better market index, as the United States, Japan and Canada, which are not expected to be affected by the German gender quota, make up 60% of this index (MSCI, 2015). Use of this index is supported in Nygaard (2011). The total return indexes are converted from US dollars into euros. Daily stock return indexes of all companies under consideration and the MSCI World index are collected from Thomson Reuters Datastream.

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Data on the board compositions of the companies is gathered by going through their annual reports. Any personnel changes during the year are incorporated, so the collected information reflects the exact board composition on the announcement dates. For each board, the size of the executive board, the number of female executive directors, the size of the supervisory board and the number of female supervisory directors are recorded. For the firms that mandatorily have to comply with the gender quota, details on whether female supervisory directors are employee representatives or shareholder representatives are included. For firms that do not have to comply with the quota on a mandatory basis these data are not collected, as they are not required to provide information on these. To identify whether directors are female, a certain procedure is followed. First, photographs of board members are inspected. If these are not provided, some research is done on directors’ names. Titles like “Mrs.”, “Miss” and “Ms.” in English annual reports and “Frau” in German annual reports indicate that a director is female. Furthermore, if the forename is a typical woman’s name, it is also assumed that the person is a woman. If the gender is still uncertain, information on the director is looked up on the internet. This includes a search for pictures, profiles (on for example LinkedIn) or articles, where the aforementioned points can be analyzed. To be able to examine whether firm size influences the impact of the gender quota on the market value of the companies, the total value of the firms’ assets is extracted from ASSET4 ESG. If these values are not available, the total value of the companies’ assets is taken from their annual reports. For many companies the value of total assets in 2014 was not available yet. For those companies the value of 2013 was taken. The Industry Classification Benchmark (ICB) is used to define a company’s industry and sector.

4.1.2 Descriptive statistics

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progress, some companies still have a long way to go. Even in 2014 there were firms without female representation on their supervisory board.

The remainder of Appendix A presents additional tables on the variables used in this paper. Table A3 explains their abbreviations and the way they are measured. Table A4 gives an overview of which sectors are part of which industry and it conveys which industries are typically male-dominated. These data are used in the regression analysis that follows. Finally, Table A5 provides a correlation matrix.

4.2 Methodology

The long-term effects of the gender quota in Germany cannot be investigated yet, so event study methodology is chosen, as with this method the economic impact of an event can immediately be observed by looking at security prices. It depends on the efficient market hypothesis by Fama (1970), which states that prices in the stock market fully reflect available information. Nygaard (2011) also uses event study methodology in his research on the impact of the gender quota in Norway and his method will primarily be followed.

4.2.1 One-factor market model

Daily returns of stock i at time t are calculated as follows:

𝑅𝑖𝑡 = ln (

𝑇𝑅𝐼𝑡

𝑇𝑅𝐼𝑡−1

) ₍₁₎

where 𝑙𝑛 is the natural logarithm, 𝑇𝑅𝐼𝑡 is the total return index of stock i on day t and 𝑇𝑅𝐼𝑡−1 is the total

return index of stock i on day t-1, with the total return index being a type of equity index that assumes that any cash distributions are reinvested back into the index. The one-factor market model is used to generate the returns in the event window that would be expected if no event occurred. This model relates the security’s return to the return on the market portfolio, in this case the MSCI World index. The market model is defined as:

𝐸(𝑅𝑖𝑡) = 𝛼̂𝑖+ 𝛽̂𝑖𝑅𝑚𝑡 (2)

where 𝛼̂𝑖 is alpha, a constant that represents stock i's return regardless of market movements, 𝛽̂𝑖 is the

beta coefficient, which measures the sensitivity of stock i to the market, and 𝑅𝑚𝑡 is the return on the

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The parameters are estimated over the 250 observed daily returns in the estimation window and they are defined as follows:

𝛽̂𝑖 =

𝐶𝑜𝑣(𝑅𝑖𝑡, 𝑅𝑚𝑡)

𝑉𝑎𝑟(𝑅𝑚𝑡) (3)

𝛼̂𝑖 = 𝜇𝑖− 𝛽̂𝑖𝜇𝑚 (4)

𝛽̂𝑖 is calculated by dividing 𝐶𝑜𝑣(𝑅𝑖𝑡, 𝑅𝑚𝑡), the covariance of the stock returns and market returns, by

𝑉𝑎𝑟(𝑅𝑚𝑡), the variance of the market returns over the estimation period. Subsequently, 𝛼̂𝑖 can be

calculated by subtracting part of the return that is explained by the market, 𝛽̂𝑖𝜇𝑚, from the mean stock

return, 𝜇𝑖, where 𝜇𝑚 is the mean return on the market index. The abnormal return (AR) of firm i at day t is the difference between its actual ex post return and the expected return generated by the market

model:

𝐴𝑅𝑖𝑡 = 𝑅𝑖𝑡− 𝐸(𝑅𝑖𝑡) (5)

where 𝑅𝑖𝑡 is the actual return calculated by filling in the observations obtained from Datastream in

formula (1) and 𝐸(𝑅𝑖𝑡) is the return that would be expected if no announcements on the gender quota

occurred, calculated by filling in formula (2). Hence, 𝐴𝑅𝑖𝑡 is the difference between the actual return of

firm i at day t and the return that would be expected if no event occurred according to the market model. The estimation window comprises 250 trading days and is described by the interval [-253,-4]. This estimation window is chosen, since it comprises a full year and it is considered long enough to let the effects of events occurring during this year cancel each other out.3_{It is also employed in the study by}

Nygaard’s (2011). The estimation window does not overlap the event window, as is prescribed in MacKinlay (1997). Because it is possible that there was news leakage before the dates of the announcements and that the market underreacted on the event dates, a multi-day event window is used to account for this. The cumulative abnormal returns for three different event windows will be calculated: [-3,3], [-2,2] and [-1,1]. The cumulative abnormal return (CAR) is defined as:

𝐶𝐴𝑅(𝜏0− 𝜆, 𝜏0+ 𝜆) = ∑ ARit 𝜏0+𝜆

τ=𝜏0−𝜆 (6)

with 𝜏0 as event day 0, the date of the announcement, 𝜆 defines the range of the event window around

the announcement date and ARiτ is the abnormal return of firm i at day t.

3_{I could have excluded event windows from the estimation windows of other events, but I initially did not do} this and it would take too much time to redo all calculations, sort the outcomes and interpret the results. I believe this does not create a problem, as there will always be events that influence the estimation window. The

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4.2.2 Parametric test & regression analysis

The ARs and CARs of companies that are subject to the gender quota on a mandatory basis and on a voluntary basis will be tested with the one-sample Student-t test. The differences between the ARs and CARs of the mandatory group of firms and the voluntary groups of firms will be tested with the two-sample Student-t test.

To test whether there are additional benefits or costs associated with having low female presence prior to the quota, the mandatory firms are ranked based on the proportion of female directors on their supervisory boards. After that the group of firms is divided into subgroups. The ARs and CARs of the top 25% companies with highest female representation are compared with the ARs and CARs of the 25% companies with lowest female presentation on their supervisory boards. The same will be done for the 33% firms that rank highest in terms of female board representation and the 33% firms that rank lowest. This test will be repeated for the differences between the subgroup of firms with above-median female presence and below-median female presence on their supervisory boards. To validate whether the size of the firm influences the reaction on the quota announcements, the same method will be applied to firms that rank high or low on firm size in terms of total assets. For both subsample tests the two-sample Student-t will be employed.

Finally, ordinary least squares (OLS) regressions are run with AR and CAR as the dependent variables. Among the independent variables are the firm’s industry, proportion of female directors on the shareholder representative side and on the employee representative side of the supervisory board, the presence of a female executive director, the size of the supervisory board, the natural logarithm of the company’s total assets.

𝐴𝑅0𝑖 = ∑ 𝛼𝑗 0𝑗𝐼𝑛𝑑𝑖𝑗+ 𝛼1𝑃𝑒𝑟𝑐𝑊𝑆ℎ𝑎𝑟𝑒𝑖+ 𝛼2𝑃𝑒𝑟𝑐𝑊𝐸𝑚𝑝𝑙𝑖+

𝛼3𝑊𝑜𝑚𝑒𝑛𝐸𝑥1𝑖+ 𝛼4𝐵𝑜𝑎𝑟𝑑𝑆𝑢𝑝𝑖+ 𝛼5𝐿𝑜𝑔𝐴𝑠𝑠𝑒𝑡𝑠𝑖 (7)

𝐶𝐴𝑅0𝑖= ∑ 𝛼𝑗 0𝑗𝐼𝑛𝑑𝑖𝑗+ 𝛼1𝑃𝑒𝑟𝑐𝑊𝑆ℎ𝑎𝑟𝑒𝑖+ 𝛼2𝑃𝑒𝑟𝑐𝑊𝐸𝑚𝑝𝑙𝑖+

𝛼3𝑊𝑜𝑚𝑒𝑛𝐸𝑥1𝑖+ 𝛼4𝐵𝑜𝑎𝑟𝑑𝑆𝑢𝑝𝑖+ 𝛼5𝐿𝑜𝑔𝐴𝑠𝑠𝑒𝑡𝑠𝑖 (8)

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5. Results

5.1 Market reaction

Panel 1 in Table B1 (see Appendix B) shows the average abnormal returns on the announcement dates and the average cumulative abnormal returns around the announcement dates for the firms that have to comply with the quota. The negative AR0 and CAR(-1,+1) corresponding to April 18, 2013 are not

significant. However, the negative CAR(-2,+2) and CAR(-3,+3) are significant at the 1%-level. Before the

voting, several members of Angela Merkel’s party, the Christian Democratic Union, announced that they were going to vote in favor of the legally binding gender quota. This caused commotion, as Angela Merkel initially stated that her party was going to vote against the proposal. The party straining and the subsequent commotion may have had a negative impact on the German stock market. To prevent a success for the opposition just before the elections the government parties made a compromise. The CDU, the CSU and the FDP promised to include a 30%-quota in their election manifesto. This may also explain the negative reaction, as the market could have anticipated the rejection of the proposal. The firms experienced positive abnormal returns around the negotiation of the draft law and the German coalition’s official agreement on the draft law.

Likewise, the firms exhibited positive abnormal returns after France and Italy implemented gender quota legislation. AR0, CAR(-1,+1) and CAR(-2,+2) for January 13, 2011, and CAR(-2,+2) for June 28, 2011, are

significant at the 1%-level. This is consistent with what was expected: the sign of the reaction to the main announcement dates, except for the rejection of the quota proposal, and to the introduction of quota legislation in France and Italy is the same. This supports that the market reactions are caused by the gender quota.

Panel 2 documents the ARs and CARs of big firms that do not meet the requirements to be subject to the quota on a mandatory basis. These firms have to set targets on female board representation, but they do not face sanctions for not accomplishing this target. As expected, the market reactions resemble the ARs and CARs of the mandatory firms, but they are generally smaller in magnitude for the main announcement dates. This gap could represent the difference in sanctions for noncompliance: the voluntary firms only have to explain in their annual reports why they do not meet the target and the mandatory firms have to leave vacant board seats empty if they fail to find a suitable female director. For the latter the costs of the quota are larger. However, none of the differences in market reactions between the mandatory firms and voluntary big firms is statistically significant. Only the difference in

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The small firms that are not subject to any additional regulations, presented in Panel 3, experience quite divergent reactions, which is also consistent with what was expected. They do not seem to react to the gender quota announcements. Especially for the German coalition’s agreement on the draft law on November 25, 2014, there is evidence that the reactions of mandatory firms and voluntary small firms differ, as CAR(-2,+2) and CAR(-3,+3) significantly differ at 1% and 5%, respectively. Even though other

factors that may have had an impact on the abnormal returns of the corporations that mandatorily have to comply with the quota cannot be ruled out, the robustness checks support that their reactions can largely be attributed to the gender quota announcements in Germany. In conclusion, hypothesis 1a is accepted and hypothesis 1b is rejected. The results suggest that the German market welcomes gender quota legislation and that the German gender quota will be beneficial to these companies.

5.2 The effect of pre-quota female presence

Table B2 (see Appendix B) demonstrates the average ARs and CARs and the differences between them of two subgroups of firms: firms with relatively high female representation and firms with a relatively low percentage of female directors in their supervisory boards. The three analyses generate identical results. The reactions of these two subgroups only significantly differed on and around April 18, 2013, the day of the rejection of the quota proposal. Contrary to the insignificant ARs and CARs of companies with a high proportion of female supervisory directors, the subgroup with low female representation exhibited highly significant negative abnormal returns. This is consistent with Nygaard (2011), who reports positive abnormal returns for firms with low information asymmetry and few female directors in the reversed situation, when a quota law is not rejected but approved. The negative reaction may signal disappointment. Because of the extensive political debate preceding the voting the expectation that Germany was going to implement a gender quota could have already been incorporated in stock prices. The rejection may have come as a surprise, and because the quota is more beneficial to companies with low female board representation, as they have suboptimal boards, these firms were struck more severely than firms with high female representation.

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accustomed to working with female directors (Adams et al. 2011). In contrast to companies with high female board representation, firms with few female directors may benefit more from the quota. The marginal positive effect of adding more women to their boards is larger. However, these firms also have to bear more costs. They have to put more effort to attain female directors and thus have more adjustment costs (Ahern & Dittmar, 2012). In conclusion, for companies with relatively high female board representation the quota might provide only small benefits, but also low costs. For firms with few female directors the quota might be more beneficial, but also more costly. Therefore, the net gains may be similar.

5.3 The effect of firm size

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ever be binding. In Norway a proposal law first needs a favorable vote in the Parliament, thereafter it needs a sanction and a mandate to become binding law. These steps were skipped and the quota law was surprisingly mandated with the sanction of forced liquidation, whereas the Prime Minister announced in a public statement that if the law would pass, the sanction would most likely be a fine (Nygaard, 2011). For German companies there are no drastic sanctions for noncompliance. When a board seat becomes vacant, it has to remain empty until a female director can fill the seat. A German company thus has some time to find a suitable, qualified candidate.

5.4 Regression results

Panel 1a in Table B4 (see Appendix B) shows the results of regressions (7) and (8) with the data of April 18, 2013. Only the percentage of female directors on the employee side of the supervisory board is significant at 5% for CAR(-1,+1) and CAR(-3,+3). Its coefficient is positive in both cases. This indicates that

firms with a large proportion of female employee representatives were less severely harmed by the rejection of the initial quota proposal. In other words, there is some evidence that female directors might add more value to the shareholder side than to the employee side of the supervisory board. However, the model has a serious lack of descriptive power, as adjusted R² is very low and even zero for the regression on AR(0). Therefore, an additional regression is done with less variables that might shed some

light on the factors that can explain the ARs and CARs. Its results are presented in Panel 1b. The number of female supervisory directors clarifies some of the variation in CAR(-2,+2) and CAR(-3,+3). Its coefficients

are positive and significant at 5%, which means that the ARs and CARs were higher for firms with more female supervisory directors. This is consistent with the results in Section 5.2: firms with low female board representation exhibit more intense negative abnormal returns. The coefficient of the size of the supervisory board is negative and marginally significant for AR(0) and CAR(-1,+1), which is in line with

Nygaard (2011) and Ahern & Dittmar (2012), who also find a negative coefficient for board size. The results of the regression on the ARs and CARs of November 18, 2013, are presented in Panel 2 in Table B4 (see Appendix B). For the negotiation of the draft law the model does a much better job, as its predictive power lies between approximately 12%-20%. It is remarkable that for AR(0) and CAR(-3,+3)

numerous coefficients on industry dummies are significant at 5% or even 1%. Especially the consumer goods, consumer services, health care, telecommunication and utility industries seem to be positively affected by the gender quota. Only the utility industry is assumed to be typically male-dominated and consumer goods partly, as it largely consists of automobile firms. As it seems that all industries are positively affected, there is no reason to believe that traditionally male-dominated sectors benefit more from the gender quota than other industries. Firm size plays an important role. It is highly significant for CAR(-1,+1), CAR(-2,+2) and CAR(-3,+3), with a positive sign. This underlines Section 5.3, which argues

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female executive directors has a marginally significant coefficient for CAR(-3,+3), which is negative. This

indicates that female directors in the management board are not necessarily beneficial when coping with the quota. The size of the supervisory board is marginally significant for CAR(-1,+1) and negative, which

is consistent with earlier results. None of the coefficients on the proportion of female shareholder representatives and the proportion of female employee representatives is significant. Their signs are both negative, which indicates that the impact of the gender quota is similar for both sides of the supervisory board.

Panel 2 in Table B4 (see Appendix B) reports the regression results of the ARs and CARs caused by the German coalition’s official agreement on the gender quota. The model has less descriptive power than the previous model. The effects can mainly be explained by firm size, which has again a positive coefficient and is highly significant for AR and all CARs. The coefficient on the size of the supervisory board is marginally significant for AR(0) and negative, which is in line with earlier results. Contrary to

the previous regression, the coefficient on the presence of female executive directors is positive in all cases. Furthermore, the coefficients on the proportion of female employee representatives is positive, except for AR(0). This indicates that there might be slight differences in the effects of having to add

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6. Conclusion

In December, 2005, Norway was the first European country to mandate a gender quota for corporate boards. It served as a leading example for many other countries to implement either voluntary or mandatory gender quotas. Germany followed suit only recently. On the 25th_{of November, 2014, the}

German coalition parties officially agreed on to a draft law. The law was passed by the first chamber of Parliament on the 6th_{of March, 2015. This paper investigates the short-term impact of the}

implementation of gender quota legislation in Germany. It employs event study methodology, which assumes that stock market movements are conditioned on all information available at the date of an announcement on the quota. The first findings show that the German market on average exhibited a significant negative reaction due to the rejection of the proposal and a positive reaction caused by the announcements on the introduction of the quota. This indicates that the gender quota is welcomed and that investors expect its overall impact to be beneficial to German companies.

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Furthermore, there do not seem to be industry-specific effects, as generally none of the coefficients of the industry dummies is significant, and when they are, they all have the same sign. This means there is no supportive proof of research by Rodríguez-Domínguez et al. (2012), who find that women are more valuable in sectors traditionally dominated by men. In addition, the presence of one or more female executive directors does not significantly influence the impact of the gender quota announcements. The coefficients on this factor are insignificant, which means that the presence of female executive directors does not necessarily make it less costly to attract female talent.

This paper has some limitations that should be acknowledged and addressed in future research. Firstly, the quota law covers 108 companies, which makes it difficult to create sufficiently large subgroups for investigation. The difference between firms with and without female presence on their boards could not be investigated, as the subgroup of firms without female supervisory was too small.4_{Secondly, event}

study methodology is based on the premise that abnormal performance is conditioned on all information available at that moment. Even though much effort was put in detecting and leaving out companies that experienced firm-specific events on and around announcement dates, there might still have been other external factors that had an influence on abnormal returns that could not be tracked. Thirdly, ordinary least squares regression is employed to establish a model for the abnormal returns. This model assumes that relationships between variables are linear. However, other functional forms might be better in clarifying what drives abnormal returns, such as exponential, logarithmic and reciprocal functions. This study is relevant to academics and investors. It contributes to the scarce literature on corporate gender quotas by providing an analysis of the short-term impact of the German gender quota and by identifying some factors that influence its effects. Furthermore, it is one of the first papers on gender quota legislation in Germany. It is interesting to compare the results with outcomes of studies on Norway, as the German context in which the quota law was passed differs from the Norwegian situation at the time. Even though women in Germany traditionally stay home or work part-time, whereas in Norway female labor force participation is quite high, investors apparently did not believe that the quota would fail due to a lack of female talent. Germany is not as accustomed to using quotas for gender equality policies as Norway (Borchorst, 1999), but this also did not seem to be an issue. The reason that German companies on average reacted positively, while studies on the quota in Norway find different results, may be that German corporations had some time to anticipate. In Table A2 (see Appendix A) it can be observed that the number of female directors on boards has slowly risen throughout the years, which could mean that the main costs of increasing board gender diversity were already made before the reform. The pool of female talent might have grown simultaneously, as women noticed there were

4_{These 108 companies comprise the whole population, but I believe that this limitation should be mentioned. If} the population was larger, other tests could have been done. Now the influence of certain company

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career opportunities and they started to pursue high-profile careers. According to Allemand et al. (2014) this is essential for a gender quota to be effective. Moreover, noncompliant German companies have to leave a board seat vacant until they find a suitable director, which is a much less drastic sanction than the threat of dissolution in Norway. So German companies face lower potential costs for noncompliance than Norwegian firms did.

This study is of particular interest for German policy makers. Even though quota legislation is seen as the most effective tool to quickly increase female board representation (Adams & Kirchmaier, 2013; Allemand et al. 2014), it may also have some serious disadvantages that should be dealt with. It fails to address the underlying causes of inequality in the workplace and it is directed at changing statistics instead of attitudes. In addition, it may have two negative consequences when a gender quota is implemented and there are insufficient candidates available. Firstly, the perception that women directors are less valuable may be strengthened, which exacerbates the problems of token female directors, and secondly, the potential efficiency that women directors contribute to board decision-making may be reduced (Allemand et al. 2014). These aspects do not seem to be meaningful issues in Germany. In general, abnormal returns following announcements on the gender quota are significantly positive for the firms affected, which indicates that the benefits of the quota outweigh its costs. This signifies that, at this moment, no policies are needed to complement the quota. The quota is considered to be valuable on its own. Apparently, there were female candidates available on the labor market and the quota was necessary to force companies to address this pool of female talent.

Whether the introduction of the German gender quota indeed will be a success in the long-term is a captivating topic for future research. One could examine its impact on firm performance, as in Nygaard (2011) and Ahern & Dittmar (2012). A major drawback of quota legislation is that it only increases the number of women holding multiple directorships (Choudhury, 2015). One could investigate whether the quota actually increases the number of women on boards. In addition, its eventual impact on the number of female executives could be examined, as the quota law is intended to also increase female representation on management boards. For Norway Ahern & Dittmar (2012) find that the quota led to the appointment of younger directors with less high-level experience, because of the small supply of qualified female candidates. Whether there are fundamental differences between women that are appointed before and after the reform could also be researched for Germany5_{. Moreover, this paper}

argues that large firms exhibit higher positive abnormal returns than small firms, because they require more monitoring and their boards may be suboptimal in terms of independence prior to the quota. One could determine whether there is indeed more statistical or taste-based discrimination against women in larger companies than in smaller ones. Singh et al. (2008) find that women are more likely to have

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