The Lehman Sisters Claim

I evaluate Christine Lagarde´s claim that more female leaders can be associated with more prudence, and less of the risky decision-making that had provoked the crisis. Indeed, the proportion of women who are employed in decision-making and management roles in governments, large enterprises and institutions varies substantially across European countries and is oftentimes below 30%. Research suggests that in addition to biological differences, men and women show morphological dissimilarities in specific brain regions, which explain the observed differences in behavior. As a result, female decision makers tend to be more risk averse, better suited to carefully analyze a problem, superior in multitasking and better in creating solutions that work for a group. Not surprisingly, firms with more female decision makers tend to outperform their peers in terms of productivity, profitability and stock performance while taking fewer risks. In this paper, I aim to explore the effect of female decision making on aggregate equity returns. Relying on an equilibrium asset-pricing model in an economy under jump diffusion, I decompose the moments of the returns of European stock market indices into a diffusive (systematic) risk and an (idiosyncratic) extreme event risk part. For a balanced panel of European countries, I find empirical evidence for a Lehman sisters’ effect: female decision making is an important determinant of (idiosyncratic) extreme event risk. As a result, stock markets in countries with more female decision makers are characterized by higher risk aversion, lower volatility and more positive return asymmetry, primarily driven by extreme event risk, e.g. the lower frequency of negative jumps. Results are robust to the inclusion of various controls for other country- or market-specific characteristics.