Corporate America has never been known for its gender diversity; in 2015, fewer women ran large U.S. companies than men named John. While the numbers are slowly improving at senior levels—women CEOs finally outnumbered Johns as of 2023—many of the country’s biggest firms have a workforce that is significantly less gender diverse than the overall population.
New research suggests that these companies are leaving serious money on the table. A forthcoming study from Yale SOM’s Jennifer Dannals, co-authored with David P. Daniels of the National University of Singapore, Stanford’s Margaret A. Neale, and Northwestern’s Thomas Lys, found that firms reporting better than expected workforce gender diversity saw abnormal positive returns—that is, higher returns relative to the overall market’s performance that day—while firms with lower than expected diversity saw a negative reaction.
“Investors reward gender diverse firms,” Dannals says. For corporate leaders concerned about the costs of implementing a diversity program, she adds, “This is a financial argument for the rewards that you might reap.”
Investors, the authors theorize, are likely familiar with existing research on workforce diversity through coverage in the popular press. This research has demonstrated potential upsides and downsides. For example, investors may believe diverse firms are more innovative, thanks to the broader range of perspectives, skills, and knowledge amongst their employees. They may also see diverse firms as less likely to be embroiled in costly discrimination lawsuits, or think of them as ethically minded firms, a quality that will then attract other investors.
However, investors may also believe that their peers, or stakeholders such as consumers, hold negative stereotypes about women (for example, that they are less qualified or technically skilled), and will react negatively to a firm reporting above-average gender diversity. They may also worry that employing people with diverse backgrounds and perspectives could lead to conflict.
In the study, the researchers set out to see how investors weigh the upsides and downsides of diversity, and find the positives appear to win out—and win big.
Dannals and her co-authors estimated the magnitude of this impact by conducting two event studies. They followed the stock market’s same-day reaction to the initial announcements by 12 large technology firms about their workforce diversity figures, beginning in 2014, when Google released its first diversity report, triggering peer firms to eventually follow suit, through 2018. They also followed the market’s reaction to the publication of diversity figures of 10 of the largest U.S. financial firms by the Financial Times on a single day in 2017.
For both event studies, the authors combed the news to ensure there were no other materially important announcements from a company on the same day its diversity figures came out, such as Apple releasing a new iPhone. They also checked to see that the returns they were observing were genuinely abnormal, by checking there were no moves of a similar magnitude for the 28 days before and the 7 days after the news announcements.
They found that on average, if a technology firm’s initial diversity report revealed one percentage point higher gender diversity, its market valuation increased by approximately $152 million; if the gender-diversity numbers were a full standard deviation higher, equivalent to 7.28 percentage points, the firm’s market valuation increased by a staggering $1.11 billion. For example, when Google first unveiled its figures in May of 2014, its share of workers who were women was just 31% , which triggered a negative share price reaction. By contrast, when eBay published its numbers in July and showed 42% women in its workforce, its stock price rose. (Overall, the percentages of women employees at tech firms ranged from 17% to 47% during the five-year period. )
The effect for financial firms was smaller but still significant: on average, one additional percentage point of gender diversity increased a firm’s market valuation by roughly $18.7 million; being one standard deviation higher, or 6.79 percentage points, boosted its market valuation by $127 million.
Why did investors see so much upside in increased diversity? It could be because, as Dannals and her co-authors note, major corporations are likely to have management processes in place to mitigate diversity’s potential productivity downsides. But upsides like lower legal liability and higher ethicality cannot be achieved with a homogenous workforce. They also theorized that the rewards were far larger for tech firms because the potential for increased creativity and innovation is arguably more important to a tech firm than a financial firm.
Of course, it’s impossible to know what investors are thinking, especially when it comes to the institutional investors whose trades are large enough to move markets. “There’s also a pretty cynical way of reading the results,” Dannals acknowledges, “which is they think having more women protects these companies against lawsuits, rather than that they think that there’s actually some benefit to their underlying performance.”
To understand better which of these beliefs mediated investor behavior, the researchers conducted an experiment with 494 real-life investors, roughly one-third women and two-thirds men. First, the investors were told that a real S&P 500 firm—known, for purposes of the experiment, as “Gamma Corporation”—either had more or fewer women employed than the average company. The researchers found that nearly 80% of individual investors predicted that firms with more women employees would see their share price rise. Then, the investors were asked to bet as much of a $1.00 bonus on their prediction as they wanted, with the caveat that if they were wrong, they’d lose everything they bet; the average bet was $0.49. Finally, the investors were asked how much they agreed with statements linking diversity to commonly cited potential upsides and downsides: creativity, legal risk, investment ethicality, stereotypes about ability, and task and relationship conflict.
They found that these individual investors’ behavior was almost entirely mediated by their beliefs in the upsides of diversity, especially their beliefs about creativity and legal risk. Although Dannals and her co-authors only analyzed gender diversity, “We would also hope that this would generalize to other forms of employee diversity,” she says.
Dannals says executives may want to take note of how positively investors perceive diversity as they weigh whether to prioritize workforce diversity when making management or investment decisions. “Lots of companies might say that they really want to improve their diversity, but what resources are they putting behind it? And what steps are they taking towards that?” she asks. One interpretation of the relative lack of progress in the past decade “could be that they just don’t think it’s that relevant for their bottom line or that valuable,” she says. The evidence from the stock market’s reaction, as captured by Dannals and her co-authors, suggests otherwise.
“The Yale School of Management is the graduate business school of Yale University, a private research university in New Haven, Connecticut.”
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