Over the past two decades, academic research has found little evidence that gender diversity on the boards of directors has a positive impact on firm value. In recent years, however, practitioners have increasingly argued that diversity among the board of directors has a positive economic impact on firms. In January 2020, the Nasdaq Stock Market filed a proposal with the Securities and Exchange Commission to adopt Rule 5605(f) (Diverse Board Representation) which argued for mandatory diversity on boards of firms listed on NASDAQ, based on economic arguments that diverse boards were positively associated with improved corporate governance and financial performance. In the same month, Goldman Sachs announced it would stop financing the Initial Public Offerings (IPOs) of companies in the U.S. and Europe with only white male board members again on the basis of superior performance by firms with gender-diverse boards.

In our paper Are Women Underpriced? Board Diversity and IPO Performance, we examine the economic impact of gender diversity on the performance of IPOs from 2000–2018. IPOs are an appropriate venue to study the effect of shareholder preferences on gender diversity because it is the only type of corporate transaction where investors can express their opinions about company valuation. Specifically, the book-building process provides a unique opportunity for investors to give feedback on the valuation range proposed by the investment bank. Investors can show that they value stocks differently from traditional valuation methods, such as discounted cash flows and earnings multiples, by incorporating a premium for diversity, for example. Because the underpricing of IPO shares reflects the difference between market valuations and the valuations by the investment bank, such a premium can be measured directly. There is no other event where this is empirically feasible. In addition, investment banks have an outsized impact on the terms of the offering and the structure of the firm. For example, the insistence by Goldman Sachs that it would not consider taking public a firm that did not have a gender-diverse board is unique. Investors can invest in any type of publicly listed firm, such as “sin stock” firms, depending on their preferences. However, if a non-gender-diverse firm is unable to go public, investors are necessarily constrained in expressing their preferences. Finally, IPO underpricing is likely to be less subject to the endogeneity problems that plague many studies that find a positive relation between gender diversity and stock market or operating performance. Indeed, it is not obvious whether diversity causes performance or vice versa. On the other hand, it is implausible that underpricing encourages firms to put women on the board.

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