The Origins of the Gender Gap
A CEO’S family background and early education have a significant effect on their later decision-making across a variety of contexts— with profound economic implications.
across agents is critical for THE OPTIMAL ALLOCATION OF RESOURCES economic outcomes, both at the level of the individual firm and of the entire economy. And yet, achieving this has proven elusive. An ongoing debate revolves around the claim that male managers obtain more resources than their female counterparts — a pattern labelled ‘the gender gap’.
Many attempts to narrow the gender gap — ranging from greater disclosure to governance rules — assume that it reflects the personal bias of senior decision-makers, in particular CEOS. However, this premise has been difficult to test because it would entail eliciting CEO preferences and making a reliable connection between resource allocations and subsequent outcomes.
We recently set out to tackle this challenge by studying and comparing two things: the personal backgrounds of CEOS and their allocation of capital budgets to male and female division managers at U.S. conglomerates. In this article we will summarize our key findings.
Portrait of the CEO as a Young Man
Our sample comprised 5,679 individuals: 596 CEOS, 1,819 division managers and 3,264 directors. The CEOS were almost exclusively male (98.5%) and, on average, 56 years old. Nearly 62 per cent of them held graduate degrees, the majority of which were MBAS. The dominant majority also served on the boards of other companies, with the median CEO holding two external board seats.
In comparison with CEOS, division managers were younger and significantly more diverse: The average manager in our sample was 50 years old, and about eight per cent were female. Compared with CEOS, division managers were more likely to hold specialized graduate degrees (79%) and less likely to hold an MBA (39%). Division managers were also significantly less likely to hold external board seats.
To elicit CEO preferences, we relied on the evidence from social economics that an individual’s views on gender issues are heavily influenced by familial, environmental and educational factors experienced until early adulthood — a period commonly referred to as the individual’s ‘formative years’. Following is a summary of our approach and our findings under these three key headings.
To obtain information on CEOS’ famiFAMILY CHARACTERISTICS. lies, we used several data sources, including federal and state census records; state records of birth, marriage and death; digital archives of white page directories; and obituaries. The federal census form in our sample provided 41 standardized variables on each member of the household, including education (in years), occupation, employment status, the number
of weeks worked during the year, annual income and place of birth, among others.
Compared with the general population, CEOS are more likely to have attended private educational institutions designated for males only.
First, CEOS’ parents are well educated. The father KEY FINDINGS: and mother of the median CEO had 14 and 12 years of formal education, respectively — approximately four years more than the median males and females in the general population in the same census. Approximately 56 per cent of CEOS’ fathers and 44 per cent of CEOS’ mothers attended college, while the fraction of individuals with college education in the general population in the same census is only 10 per cent and eight per cent, respectively.
Second, CEOS come from well-to-do families with whitecollar occupations. Nearly 71 per cent of their fathers held whitecollar jobs, and 37 per cent were managers or business owners. Other frequent occupations among CEOS’ fathers were sales (8%), engineering and research (8%), academia (5%) and medicine (4%). These occupations put the median CEO father in the top quartile of the national income distribution. Moreover, a sizable fraction (16%) of CEOS grew up in ultra-wealthy families with incomes in the top 1% of the national distribution.
Third, CEOS’ fathers typically have a higher economic status than CEOS’ mothers, and these within-family differences exceed those in the general population. The father is the primary income earner in the dominant majority of CEOS’ families. In contrast, CEOS’ mothers are less likely to work outside their home (21%) than women nationwide (42%). When they do, their median income is approximately one half (46%) of CEOS’ fathers. The average difference in educational attainment between the CEOS’ parents (1.6 years) exceeds the corresponding difference between males and females in the general population (0.4 years).
The average (median) CEO had 2.8 children, slightly more than the number of children for the average male of the same age (2.0), as would be expected for wealthy families.
We constructed the firstHIGH SCHOOL AND COLLEGE EDUCATION. ever dataset of CEOS’ high schools by using the digital archive of high school yearbooks maintained by Ancestry.com. We supplemented this resource with data from Boardroom Insiders, CEO biographies and high school publications that identify notable alumni. When high school information was missing from these sources, we contacted the registrar of the university attended by the CEO and requested the information in writing.
We recorded the following characteristics for each CEO’S high school: address, gender composition status (same-gender or co-educational), religious affiliation (if any) and private/ public status. For each school, we recorded this information for the period of the CEO’S attendance (ages 14-18), using the history section of the high school’s website. We also recorded the gender composition of the college where they earned their undergraduate degree by computing the average fraction of female students during the period of CEO attendance (ages 18-22). We obtained this information from the U.S. Department of Education.
Compared with the general population, CEOS are KEY FINDING: more likely to have attended private educational institutions designated for males only. Approximately one quarter of CEOS attended private schools, and 16.4 per cent of CEOS attended allmale schools; 49 per cent went on to attend private colleges, and 9.9 per cent attended colleges restricted to male students.
To study the effect of ‘community COMMUNITY CHARACTERISTICS. norms’, we obtained information on gender-related demographic variables in the county where the CEO grew up. We identified the CEO’S home county based on the location of their high school and parents’ home address. For each CEO, we collected the following community-based information:
• The labour force participation rate for adult males and females;
• The annual income for employed males and females;
• The number of years of education for males and females; and
• The unemployment rate for males and females of working age.
This data came from an anonymized set of household census records known as the Integrated Public Use Microdata Series (IPUMS). We measured the above community characteristics as of the decennial census year closest to year when the CEO reached the age of 18. For example, for a CEO born in 1944 (who reached the age of 18 in 1962), we used the community characteristics from the 1960 decennial federal census.
The data reveals a large difference in labour force KEY FINDING: participation between male residents (94%) and female residents of working age (42%) in CEOS’ home communities. For
working adults, the average annual income for men ($5,726 in 1960 dollars) was more than twice as large as that of women ($2,846 in 1960 dollars). For those seeking employment, the average unemployment rate was lower for men (4.8%) than for women (5.5%). Interpreted together, these statistics suggest that CEOS grew up in communities where, at the time of their formative years, males were more likely to hold outside employment, and when they did, they earned higher incomes and faced lower unemployment than their female counterparts.
In summary, CEOS come from white-collar, well-educated families with the typical incomes in the top quartile of the national distribution. In the majority of CEOS’ families, the father was the only income earner and the more educated spouse. Similar, albeit smaller, differences in the socioeconomic status of men and women were observed in the communities where the CEOS spent their adolescence.
How CEOS Allocate Resources
When we moved on to study resource allocation within organizations, our first key finding was that female division managers obtain about 90 basis points less in annual capital expenditures than male managers — an economically important difference of $2.8 million per year for the median sample firm. Interestingly, this gap in capital budgets expands if the CEO grew up in a community with larger differences in labour force participation, education and income between male and female residents of working age.
Educational background had particularly important mediating effects: The gender gap in capital budgets was greater for CEOS who attended all-male high schools. Similarly, using variation in the gender composition of colleges (resulting from the opening of many U.S. colleges to women), we found that the gender gap was higher for CEOS who attended same-gender rather than co-educational colleges.
Taken together, we estimate that the effects of familial, environmental and educational factors from CEOS’ formative years explain up to 70 per cent of the economic gap in capital allocations between male and female division managers. Furthermore, we found that two economic mechanisms contribute to the gender gap in capital budgeting: the appointment of certain
managers to capital-rich divisions; and extra capital allocations after the appointment is made. In our analysis of the first item, we found that male managers are assigned to divisions that historically receive more capital and some evidence that male managers are assigned to larger divisions.
Our results are consistent with survey evidence that CEOS’ personal attitudes towards division managers have profound effects. For example, in a study of financial decision-making at S&P 500 firms, researchers found that the CEO’S opinion of a division manager is the second most important factor in capital budgeting, after the NPV (net present value) rule. Our evidence suggests that the gender gap in resource allocation is indeed related to the decision maker’s gender attitudes, whether conscious or subconscious, and that the origins of such attitudes can be traced to the CEO’S formative years.
Following is a summary of our key findings regarding capital allocation when combined with family characteristics, education and community.
We defined the variable ‘working mothFAMILY CHARACTERISTICS. er’ as an indicator that equals ‘1’ if the CEO had a working mother and ‘0’ if she was a housewife, and compared the allocation of capital to male and female division managers across firms run by these two types of CEOS. The result: Female division managers obtain about 150 basis points less in annual capital in firms run by CEOS whose mother did not work. Conversely, there is not a statistically significant difference between the allocation to male and female managers in firms run by CEOS with a working mother.
We also investigated whether parenting daughters affects CEOS’ allocation of capital between female and male division managers. We defined ‘children’s gender imbalance’ as the difference between CEOS’ number of sons and daughters, normalized by their total number of children. The result: Female division managers obtain less capital in firms run by CEOS with a high children’s gender imbalance. However, the difference in capital allocation between male and female managers disappears in firms run by CEOS with a balanced number of sons and daughters.
To capture the overall effect of CEOS’ family backgrounds, we calculated a comprehensive family index as the average between the percentile rankings of each CEO’S working mother, parents’ education imbalance, and children’s gender imbalance values. The result: Female managers obtain 170 basis points in capital expenditure in firms run by CEOS with higher family-related gender imbalance. In contrast, there is no difference in allocation between male and female managers in firms run by CEOS with low values on the family index.
Next, we considered the education of CEOS’ parents EDUCATION. with respect to capital allocation. The variable ‘parents’ education imbalance’ equalled the difference between the number of education years for the CEO’S father and the CEO’S mother. Higher values imply that the CEO’S father had a higher educational attainment than his mother. The result: Female division managers obtained less capital only in firms run by CEOS with a high ‘parents’ education imbalance’. In particular, female division managers in such firms obtained about 120 basis points less in annual capital than male managers.
We defined ‘high school gender imbalance’ as an indicator variable that equals ‘1’ if the CEO attended a single-sex high school and zero otherwise. University gender imbalance was defined as the fraction of female students in the university that the CEO attended as an undergraduate student (as of the dates of attendance). The result: Female division managers obtained significantly less capital only in firms run by CEOS that attended gender-imbalanced educational institutions. A high gender imbalance in CEOS’ high schools corresponded to about 160 basis points less capital allocated to female managers, whereas a high imbalance in CEOS’ universities corresponds to about 120 basis points less capital.
We also calculated a comprehensive index of education gender imbalance as the average percentile ranking of High School Gender Imbalance and University Gender Imbalance, finding
Female division managers obtained 150 basis points less in annual
capital in firms run by CEOS whose mothers did not work.
that CEOS’ High School Gender Imbalance corresponds to a difference of 140 basis points in the allocation of capital to male and female managers.
We focused on the gender COMMUNITY WHERE THE CEO GREW UP. imbalance in labour force participation, income and education in the county where the CEO grew up. ‘Labour force participation gender imbalance’ was defined as ‘the difference between male and female labour force participation rate’; while ‘income gender imbalance’ was defined as ‘the difference between the average income of men and women in the county where the CEO grew up’ and ‘education gender imbalance’ was defined as ‘the difference between the number of education years of men and women in the county where the CEO grew up’. The result: High gender imbalances in CEOS’ communities corresponded to 95 to 117 basis points less in annual capital being allocated to female division managers than male division managers. In contrast, the allocation to female and male managers was not significantly different in firms run by CEOS who grew up in communities with low gender imbalances. We also calculated a similar comprehensive index of community gender imbalance and found that a high gender imbalance corresponds to about 110 basis points less in annual capital obtained by female division managers relative to their male counterparts.
In closing
The gender gap in capital allocations within organizations is a very real phenomenon, and our evidence indicates that it is driven by CEO characteristics that can be traced to the leader’s formative years.
We are not the only researchers to study the effects of gender and experience on leadership in organizations. Gompers and Wang found that a decision-maker’s parenting of daughters leads to an increased propensity to hire female partners — resulting in better performance outcomes; and Cronqvist and Yu found that CEOS who experience the birth of a daughter tend to increase spending on corporate social responsibility.
Other evidence suggests that gender and background influence the allocation of resources at a macro level by affecting national legislation and federal courts. And the effects go beyond economics: Washington found that U.S. Congressmen’s exposure to gender diversity via parenting daughters increases their propensity to support policies on women’s rights; and Glynn and Sen showed that U.S. Federal Court judges with more daughters are more likely to support women’s issues in their case decisions.
Taken together, the evidence to date underscores the importance of an individual’s education and familial factors for decision-making across a variety of contexts, and the potential for profound economic and societal implications.
Ran Duchin is a Professor of Finance and Business Economics and the William A. Fowler Endowed Professor at the Foster School of Business, University of Washington. Mike Simutin is an Associate Professor of Finance and Associate Director of the International Centre for Pension Management at the Rotman School of Management. Denis Sosyura is an Associate Professor of Finance at Arizona State University’s W.P. Carey School of Business. Their paper, “The Origins and Real Effects of the Gender Gap: Evidence from CEOS’ Formative Years”, is available online. It won the Best Paper Award at the University of Colorado’s 2018 Front Range Finance Seminar.