Do investors care if a company has a lot of gender diversity? The surprising answer is yes, according to a new research study from professors at the National University of Singapore (NUS) Business School, Northwestern University, Stanford University and Yale University.
The study’s lead author David P. Daniels, who is Presidential Young Professor at NUS Business School, conducted empirical analyses of stock-price reactions to firms’ diversity reports. He found that diversity reports that revealed (relatively) low workforce gender diversity numbers triggered a negative stock-price reaction – whereas high numbers triggered a positive reaction.
The study examined both major U.S. technology firms, like Google and eBay, and also major U.S. financial firms, like JPMorgan and Blackrock. For technology firms, Daniels analysed how firms’ stock prices reacted to the release of their diversity reports from 2014 through 2018. (2014 was the year Google released its first diversity report, causing many peer companies to also begin releasing their own diversity reports.) Daniels’s analysis found that revealing just 1 percentage point more gender diversity (via a first diversity report) could boost a technology company’s stock-market valuation by an enormous $152 million. For financial firms, Daniels examined stock price reactions to firm diversity numbers that were revealed by the Financial Times in 2017. Here, Daniels’s analysis found that revealing only 1 percentage point more gender diversity could boost a financial company’s stock-market valuation by $18.7 million – still a large effect, although smaller than for technology companies.
It’s widely known that women are often underrepresented in major companies, especially in leadership and technical roles. But before the new research study came out, prior field studies had produced inconclusive results about whether gender diversity is truly good for business. Some prior studies suggested diversity might be an asset because it boosts creativity and innovation, yet other prior studies instead suggested that diversity might be a liability because it leads to more unproductive interpersonal conflict. However, correlation is not causation, and nearly all of those prior studies had a critical limitation: they were only able to show a correlation, not true causation.
“If companies were to hire more women, would it really cause better performance? Or are better-performing companies simply able to hire more women? Typically, it’s extremely hard to answer that question,” Daniels says.
But the new research study can answer it, by deploying a quasi-experimental research design that researchers in finance and management call an “event study.” Carefully using this research design allowed Daniels to go beyond correlations, and to actually demonstrate plausibly causal effects: that is, stock price reactions that were caused by the diversity reports.
As Daniels points out, reverse causality is not possible here, because “there’s no way that a same-day stock price reaction affected gender diversity.” In addition, Daniels and research assistants carefully sifted through months of news to exclude any observations that may have been contaminated by other types of financially relevant news (like a merger announcement or major product launch) on the same day.
To increase confidence in causality even further, the researchers also conducted what they call “placebo test” analyses. Daniels explains that “before the diversity reports were released, firms’ stock prices don’t show any clear pattern of stock price reactions, or stock price changes that are unexpectedly high or low given how well the overall stock market is performing. But on the exact day when the diversity reports were released, we immediately see large stock price reactions appear – exactly when and exactly where they should appear. We see high-diversity reports triggering positive same-day stock price reactions, and we see low-diversity reports triggering negative same-day stock price reactions.”
Daniels concludes: “This all points toward a new kind of business case for diversity, driven by investors: major companies with more workforce gender diversity may be ‘rewarded’ by investors, in the sense that they are likely to get substantially higher stock-market valuations.”
To corroborate their findings using stock-market data, and to investigate why investors value workforce gender diversity, Daniels and his colleagues then turned to randomised laboratory experiments. In one such experiment, they recruited 502 people who had previously invested in the stock market and asked them to place monetary bets on what happened to a firm’s stock price after it released a diversity report. Overwhelmingly, these investors bet that diversity reports that revealed low diversity numbers would trigger a negative stock price reaction, while high diversity numbers would trigger a positive reaction – the same pattern the researchers found in the stock-market data.
Furthermore, the researchers found that investors’ bets were linked to their intuitions or beliefs about diversity’s potential upsides – for instance, beliefs that more diverse companies are more creative or less likely to face costly lawsuits, or that investing in diverse companies is more ethical. In contrast, investors’ bets were not linked to their beliefs about diversity’s potential downsides, such as the possibility of more interpersonal conflict.
Why did investors’ bets track their intuitions about diversity’s potential upsides, but not diversity’s potential downsides? According to Daniels and his colleagues, investors may be reasoning that in major firms, there are likely to be management processes in place which can help mitigate diversity’s potential downsides (like increased conflict) while also catalysing its potential upsides (like increased creativity).
Daniels ends by offering a caveat: “Although investors are definitely making bets based on their intuitions about diversity, it doesn’t necessarily mean that their intuitions are totally accurate. (In other research I’ve done, we’ve found that people’s intuitions about diversity and other important phenomena seem to be wrong, or even biased.) But here’s what it does mean: it’s crucial to understand investors’ intuitions about diversity, because intuitions can have major economic consequences.”