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Board composition

Yes, Investors Care About Gender Diversity

by Roberta Kwok

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 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.

Quantifying the Value of Gender Diversity in Tech

The team decided to start by studying technology firms. Research had suggested that more diversity would promote innovation, and in tech, “innovation is everything,” Lys says. As such, this sector was a natural place to test whether investors reward companies with more women.

The wave of disclosures among tech firms started in 2011 when Intel, Dell, and Ingram Micro released their diversity data in response to a request from CNN. Then in 2014, Google shifted the tone for the whole industry by publishing its own diversity report. Since then, many other firms, including Yahoo!, Facebook, Twitter, and Apple, have done the same.

The team examined 49 gender-diversity announcements by tech companies from 2014 to 2018. The percentage of women at these firms ranged from 17 percent at NVIDIA to 47 percent at Groupon. Then the researchers calculated each company’s “abnormal return”—that is, how much its stock return exceeded what was expected based on overall U.S. market returns—on the day of the announcement. If any other significant news about the company had emerged on that day, they discarded that announcement from the data set.

Diversity figures did seem to make a difference, the team found. Every additional percentage of women on staff at the time of a company’s first announcement was associated with a 0.1 percentage point average increase in stock price. Meaning, all else being equal, if two companies released their diversity figures on the same day, the stock price of the company with 40 percent women would increase by one percentage point more than the stock price of a company with 30 percent women.

While that effect may seem small, it could amount to tens or hundreds of millions of dollars for a large tech firm.

Investors Favor Finance Companies with More Women

Next, the team turned their attention to finance firms. While those companies aren’t as well-known for innovation, they depend heavily on good relationships with regulators.

“Pleasing the regulator goes to the very core of the existence of this industry,” Lys says. His team speculated that, for political reasons, regulators probably looked more favorably upon firms with more women. So perhaps investors would value diversity in finance firms as well, the researchers theorized.

They analyzed diversity figures from 10 companies that were published in a 2017 Financial Times article. When they looked at the percentage of women at each firm, a similar pattern emerged: an additional percentage point of women at the company was linked to a 1.65 percentage point increase in stock price on the day the article was published—roughly 10 times the size of the effect in the tech industry.

Finally, the team conducted an experiment to see if the results held up in a more controlled setting.

The researchers recruited 389 managers, about half men and half women, to participate in an online study. Participants were told that a tech or finance company had announced its gender-diversity figures. Some participants were told that the numbers were above average for that industry, while others were told that the numbers were below average.

Participants then could choose to bet on whether the company’s stock price would rise or fall as a result. Each person was given $1, and they could wager some or all of it.

When participants were told that the firm’s diversity was above average, 77 percent of them bet that the stock price would rise. Among those told that diversity was below average, only 25 percent bet on a stock-price increase.

The researchers also surveyed participants about their beliefs on diversity. For example, the survey asked whether they thought companies with higher gender diversity were more or less likely to have original ideas, hire people with leadership potential, be hit with lawsuits, or experience personality conflicts.

Not surprisingly, these personal beliefs also influenced participants’ betting decisions. The more strongly a person believed that diversity benefited a firm, the more they were willing to wager that a positive diversity announcement would boost stock value.

What Explains the Gender Gap in Tech and Finance?

Women comprise around 30 percent of the tech industry and 20 percent of the finance industry. Given the study’s findings, it seems puzzling that companies haven’t done more to increase their numbers of female employees.

Why might this be the case? The researchers hypothesize that top managers do consider gender diversity a high priority, but they (or the middle managers they oversee) may still make biased hiring decisions due to the powerful psychological tendency to be drawn to similar people.

That could help explain why many companies with below-average diversity figures (such as Dell and Intel) nonetheless chose to announce them publicly: doing so could push managers throughout the company to hire more women, by increasing public pressure and scrutiny.

And while companies with low diversity may suffer from announcing their diversity figures, keeping those figures secret could backfire, too. Investors might interpret silence as “the worst type of news,” Lys says.

So how can companies improve gender diversity, given that even well-meaning managers may tend to disproportionately hire men?

Simply telling hiring managers that diversity will boost the stock price isn’t likely to work, Lys says, since the stock value would have to change dramatically to have any direct financial impact on most employees. Instead, he suggests that leaders institute policies that make their company more equitable and inclusive.

For instance, they might strip gender information from resumes, or ensure that recruitment ads use gender-neutral language (e.g., avoiding gendered pronouns, and replacing gender-charged terms like “hacker” or “ninja” with descriptive titles such as “engineer”). Or they might require that interviewing committees include a certain number of female employees, to increase the chances that women who are offered positions will accept. (For more ideas, read what Kellogg’s Nicole Stephens has to say about fostering inclusivity.)

Such initiatives could take on new urgency, given the evidence that improving gender diversity is not only a moral issue, but actually good for business. “Investors will reward or punish you depending on the outcome,” Lys says.


Previously published in Kellogg InsightReprinted with permission of the Kellogg School of Management.

Roberta Kwok is a freelance science writer based in Kirkland, Washington.


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