Investors’ Response to the #MeToo Movement: Does Corporate Culture Matter?

Abstract

This paper provides evidence that the #MeToo movement revised investors’ beliefs about the costs (benefits) of fostering an exclusive (inclusive) culture, as reflected by the absence (presence of a critical mass) of women directors in the board room. Tracking the timeline of events associated with the #MeToo movement, beginning with the Harvey Weinstein exposé in October of 2017 in The New York Times, we document contrasting market reactions to the movement depending on the existing culture of the firm. While firms that historically have excluded women from their board experienced a negative market response as momentum for the cause increased, firms that historically embraced the inclusion of women on their board enjoyed positive returns as #MeToo events unfolded. In contrast, examining randomly generated pseudo-events occurring during the same time frame, we do not detect differences in the market’s response to these pseudo-events when comparing firms with exclusive and inclusive cultures. In the context of increased regulator attention to board gender diversity as well as the ESG activist campaigns by large institutional investors, our study documents a shift in investors’ beliefs about the risks associated with future revelations of sexual misconduct and also about the value of having women in the board room shaping the culture of the firm.

Keywords: Board of directors; gender; diversity; corporate culture; ESG

JEL Classification: M14, G34