Looking into 14 years of panel data from US public firms, the study found that companies with more female directors were penalised.
"Firms that increase board diversity suffer a decrease in market value and the effect is amplified for firms that have received higher ratings for their diversity practices across the organisation," said Isabelle Solal, co-author of the study and post doctoral research fellow at INSEAD.
"If investors believe that female board members have been appointed to satisfy a preference for diversity, then by increasing board diversity, a firm unintentionally signals a weaker commitment to shareholder value than a firm with a non-diverse board," said Kaisa Snellman, co-author of the study and assistant professor of organisational behaviour at INSEAD.
Some reports by consulting firms and financial institutions have shown a positive correlation between company value and gender-diverse boards, but recent studies based on long-term data show a negative effect on female board representation. The explanation is found in how investors interpret the decision.
"Our results imply that when additional information on the firm's preferences is available, the market relies on that information in order to lessen the uncertainty surrounding the board diversity cue. Additional information may come from observing other choices the firm makes, notably in terms of diversity policies," Snellman said.
Snellman and Solal suggested that fostering awareness is the first step in addressing and eliminating damaging assumptions. They urge firms to carefully frame female appointments and reassure shareholders of corporate goals. Over time, just as greater exposure to female leaders has been shown to reduce stereotype bias, the increase in female board appointments should likewise decrease the perception that firms select directors for any reason other than their qualifications.
"There is strong evidence that diverse and inclusive teams make better decisions, faster, leading to improved outcomes. Society and businesses are making slow but steady progress in breaking down barriers and embracing the rich value that comes with greater diversity and inclusion, but this important research is another reminder that we still have a long way to go," said Pinar Keskinocak, 2020 president, of INFORMS journal.