Mandated Board Gender Diversity and ESG Performance: Evidence From the European "Women on Boards" Directive

Using the 2022 European Union (EU) "women on boards" directive as a backdrop, we examine its wealth impact on firms in reference to their sustainability scores. Our analysis shows that investors respond positively to the EU gender quota, with a stronger effect on firms with low ESG scores. Particularly, we find that the abnormal returns on the announcement day are 0.5% higher on average for firms with weaker ESG performance, suggesting they have more to gain from the EU quota regulation. Our results reveal also that investors' expectations about the impact of the EU gender quota on ESG performance and firm value vary with differences in the institutional context across European countries. We observe more positive response in countries with strong regulatory environment characterized by high regulatory quality and strong legal enforcement and also in countries aligned with gender equality and sustainability values.