The Origins and Real Effects of the Gender Gap: Evidence from CEOs’ Formative Years

In the paper The Origins and Real Effects of the Gender Gap: Evidence from CEOs’ Formative Years (forthcoming in the Review of Financial Studies), we provide the first systematic evidence on the socioeconomic backgrounds of U.S. CEOs. Using individual census records for the families where the CEOs grew up, we study how CEOs’ formative experiences affect their capital allocation decisions. Our main finding is that CEOs raised in male-dominated families—those where the father was the only income earner and had more education than the mother—hire fewer women and allocate smaller capital budgets to female managers. We argue that gender effects in financial policies originate in CEO beliefs developed during formative years.

Our study is motivated by an ongoing debate about whether male managers obtain more resources, such as pay, capital, or promotion opportunities, than their female peers. If such a gender gap exists, it remains unclear whether it reflects a potential bias of the decision makers or results from economic factors correlated with gender, such as productivity or risk aversion. Similarly, the effects on economic outcomes are not fully understood.

These two open questions—the origins and real effects of the gender gap—are the primary focus of this paper. Many proposed policy responses aimed at narrowing the alleged gender gap assume that it reflects a personal bias of the decision maker, such as the CEO. Yet, this premise is difficult to test because it requires eliciting CEO beliefs and connecting resource allocations to outcomes.

Our paper makes a step toward addressing both challenges. We study capital allocations to male and female division managers at U.S. conglomerates. To elicit CEO beliefs, we rely on the evidence in social economics that an individual’s views on gender issues are shaped by familial, environmental, and educational factors experienced until early adulthood, a period called formative years. In particular, individuals form an outlook on gender roles by observing the responsibilities of their parents and the norms on gender equity in the community and at school.

To study CEOs’ formative years, we hand-collect data on the households where CEOs grew up from individual census records. CEOs come from well-to-do families, where the father is the primary earner with the median income at the 75th national percentile. About 71% of CEOs’ fathers hold white-collar jobs, and 35% are managers or entrepreneurs. The median CEO father has 3–4 more years of education than the median adult male in the same income group or in the general population, respectively. As common for the spouses of high income earners, CEOs’ mothers are more likely to stay at home (79%) than women nationwide (58%). When CEOs’ mothers hold outside employment, their most common occupations are teachers (28%) and secretaries or clerks (21%), and their median income is at the 57th national percentile.

Our first result is that female division managers obtain 9–13% less in annual capital expenditures than male managers with the same observable characteristics, resulting in an economically important difference of $13.2–$19.3 million per year in investment funding for the average division.

By exploiting within-firm variation in CEOs, we find that the gender gap in capital allocations is related to the CEO’s early-life exposure to gender inequity in the family, community, and school. Among these factors, the CEO’s family has the strongest effect. Taken together, the effect of familial, educational, and environmental factors from CEOs’ formative years explains the majority of the gender gap in capital allocations.

We identify two economic mechanisms that contribute to the gender gap in capital budgeting: (i) appointment of male managers to capital-rich divisions (the appointment channel) and (ii) extra capital allocations after the appointment (the capital allocation channel). We find that male division managers are assigned to more profitable divisions which historically receive more capital. To disentangle the capital allocation channel from the appointment channel, we exploit CEO turnovers for natural causes (death, illness, and retirement) and study the change in capital allocations when CEO characteristics change, but the assignment of managers to divisions remains constant. When a CEO with a more conservative background assumes power after his predecessor leaves for natural causes, the gender gap in capital allocations to the same division managers rises, and vice versa.

We consider several nonmutually exclusive explanations for the relation between CEOs’ backgrounds and the gender gap in capital budgets: (1) information asymmetry, (2) favoritism, (3) childbirth, and (4) risk-taking. We find stronger evidence for the first two channels.

In our final analysis, we study economic outcomes. In the analysis of labor flows, we find that female division managers are more likely to separate from and less likely to be promoted at firms run by CEOs with greater early-life exposure to gender imbalances. Under such CEOs, capital allocations across divisions become less responsive to growth opportunities, and divisions run by female managers experience weaker growth and profitability. These patterns are negatively associated with firm operating performance and stock returns.

In summary, the gender gap in resource allocation is related to the decision maker’s gender attitudes, whether conscious or subconscious, and the origins of such attitudes can be traced to one’s formative years. This effect has large implications for capital investment and introduces frictions in financial decisions.

The complete paper is available for download here.