Yes, Investors Care About Gender Diversity

Yes, Investors Care About Gender Diversity

Tech companies used to be tight-lipped about the gender breakdowns of their employees. Some even argued that such information was a trade secret. But in recent years, that trend has reversed. Google, Facebook, Apple, and many other tech firms have released diversity reports, which show that the fraction of women ranges from about one-sixth of workers to nearly half.

These reports got Thomas Lys, a professor emeritus of accounting information and management at Kellogg, and collaborators wondering: Do the investors who read these reports value gender diversity?

“Our focus was: Can you make a business case for diversity?” says Lys. If so, then reports revealing relatively high diversity should boost stock prices more than those revealing low diversity.

That’s exactly the pattern that emerged in a study of technology and finance companies, conducted by Lys and his colleagues. When companies reported a higher percentage of women, investors appeared to reward them with larger increases in stock value.

The magnitude of the effect is “surprisingly large,” Lys says. For example, the researchers estimate that if the share of women at Google had been one percentage point higher when the firm released its diversity report in 2014, the company’s market capitalization would have been about $375 million higher at the end of the day of the announcement.

For Lys, the message is clear. “Investors value gender diversity, that’s for sure,” he says. “They value it very strongly.”

A Fresh Perspective on Diversity in Business

Many academic studies have attempted to rigorously tease out whether diversity improves team performance. Results have been mixed, partly because it is difficult to separate diversity from the multitude of other factors that determine a company’s success—though randomized experiments, often considered the “gold standard” of scientific evidence, have tended to show that diversity is beneficial.

But little has been done to determine how investors feel about diversity.

“Investors have been an overlooked constituency,” says Stanford University Professor Emerita Margaret Neale, who coauthored the paper along with her former students David Daniels, now at the Hong Kong University of Science and Technology Business School, and Jennifer Dannals, now at the Tuck School of Business at Dartmouth.

There are some studies that examine investors’ responses to increasing the number of women on boards of directors, again finding mixed results. But little work has actually addressed how investors feel about diversity among rank-and-file workers, which presumably would more directly influence company productivity.

“Investors value gender diversity, that’s for sure.”

— Prof. Thomas Lys

Investors might see pros and cons to diversity. On one hand, they might believe that diversity boosts creativity, or that more diverse firms are less likely to become embroiled in legal troubles, such as discrimination lawsuits, both of which could be good for the company’s bottom line. Or perhaps investors believe that increasing diversity is simply the morally right thing to do.

On the other hand, investors might buy into stereotypes that women aren’t as good at leading teams or performing technical tasks. Or they might worry that more diverse teams will have problems getting along.

The key question, Neale says, is whether investors believe the benefits of gender diversity outweigh the costs. If so, that net positive attitude should be reflected in stock-price changes.

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