Companies That Have More Gender Diversity Do Better

If a company has a lot of gender diversity, do investors care? Surprisingly, the answer is yes, according to our new research paper (which I coauthored with professors from Northwestern University, Stanford University, and Yale University) published in Organization Science, which you can download and share for free.

In our first study, I conducted an empirical analysis of stock price reactions to firms’ diversity reports. We found that when a firm’s first diversity report revealed relatively low workforce gender diversity numbers, it triggered a negative stock price reaction—while relatively high diversity numbers triggered a positive reaction.

We examined major U.S. technology firms, such as Google and eBay, as well as major U.S. financial firms, such as JPMorgan and Blackrock. For financial firms, we estimated that having 1 percentage point more gender diversity could boost their stock market valuation by $18.7 million. For tech firms, we estimated that having 1 percentage point more gender diversity could boost their valuation by a colossal $152 million.

Testing the Business Case for Diversity

Get the paper (free): https://bit.ly/investors_diversity

Source: David P. Daniels

Women are often underrepresented in major firms, particularly in leadership and technical roles. But, before our new research paper was published, prior field studies had produced inconclusive findings regarding whether or not gender diversity is good for business. Some previous studies suggested diversity may boost creativity and innovation, whereas other studies suggested diversity may lead to more conflict. However, most of these studies shared a key weakness: they could only demonstrate correlation, not causation (which are not the same thing).

Does hiring more women cause better performance, all else being equal? Or are better-performing companies able to hire more women? Usually, it’s very hard to know.

But in our study, by carefully examining stock price reactions to diversity reports—using a quasi-experimental research design that researchers in finance, economics, and management call an “event study”—we were able to go beyond showing correlational relationships to demonstrate plausibly causal relationships.

For one thing, there’s no way that a same-day stock price reaction affected gender diversity. In addition, research assistants and I combed through months of news to exclude data points that might have been contaminated by financially relevant news announcements that were unrelated to the diversity reports (such as a major product launch or merger announcement). Moreover, we also conducted what researchers call "placebo-test" analyses; that is, before firms' diversity reports were released, their stock prices don’t show any clear pattern of abnormal returns. But on the exact day when firms' diversity reports are released, we immediately see large abnormal returns appear—exactly when and exactly where they “should” appear—with high-diversity reports triggering positive same-day abnormal returns and with low-diversity reports triggering negative abnormal returns.

All this points toward a new kind of business case for diversity, driven by investors: major firms with more workforce gender diversity are likely to be “rewarded” with substantially higher stock market valuations.

Why Diversity Is Valued By Investors

To corroborate these findings and to examine why investors value workforce gender diversity, my coauthors and I turned to randomized laboratory experiments. In one experiment, we recruited 502 people who had previously invested in the stock market, and we asked them to place monetary bets on what happened to firms’ stock prices after they released a diversity report.

Overwhelmingly, investors bet that diversity reports revealing low diversity numbers would trigger a negative stock price reaction, whereas high diversity numbers would trigger a positive reaction—exactly like the pattern we found in the field. In addition, investors’ bets were linked to their intuitions or beliefs about diversity’s potential upsides—namely, beliefs that more diverse companies are more creative and less likely to face costly lawsuits, and that investing in diverse companies is more ethical.

Investors’ bets were not linked to their beliefs about diversity’s potential downsides (such as the possibility that more diverse companies might suffer from having a lot of interpersonal conflict, or from being negatively stereotyped).

Why did investors’ bets track their intuitions about diversity’s potential upsides, but not its potential downsides? Investors may be reasoning that in major firms, there are likely to be management processes in place that can help mitigate diversity’s potential downsides (like increased conflict) while accentuating its potential upsides (like increased creativity).

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Of course, although investors are certainly making bets based on their intuitions about diversity, this doesn’t necessarily mean that their intuitions are accurate. In many cases, people’s intuitions about diversity and other important phenomena seem to be wrong, or even biased. But this does mean that it’s crucial to understand investors’ intuitions about diversity – because intuitions can have major economic consequences.