When Companies Improve Their Diversity, Stock Prices Jump

In 2014, the big U.S. tech companies did something surprising: They told the world how few women they employed. Men comprised 70% of Google’s workforce; Facebook, Apple, and Twitter looked similar. The mix was even more lopsided in more senior leadership and technical roles.

Most of the business world has come to believe that workforce diversity is good for the bottom line, and tech companies hoped their new transparency would lead to more equality. It didn’t. But new research suggests that investors were paying attention.

In a study released today by the Stanford Graduate School of Business, a group of researchers found that share prices jumped when companies reported better-than-expected gender diversity; they fell when firms announced demographics that underwhelmed.

The same pattern held when the academics turned their attention to finance companies. A lab experiment demonstrated the same trends, and participants reported a handful of beliefs that explained why they were more likely to invest in companies with more gender diversity.

Google was the first to release its figures, and after accounting for other factors, the researchers calculated that the company’s stock fell 0.39 percentage points on the news. They projected that if Google had reported that women made up 31% of its workforce, instead of 30%, it could’ve added $375 million in market value. “This is a huge response,” said Margaret A. Neale, a distinguished professor at Stanford who worked on the study. The group of researchers also included academics from the Tuck School of Business at Dartmouth College, Northwestern University and the Hong Kong University of Science and Technology.

They also used Google as a benchmark to see how the market reacted when firms reported more or less diversity compared with an industry leader. The stock price was “affected strongly” by how companies looked compared to Google, they found. A tech firm whose workforce was 1 percentage point more diverse than Google’s saw shares gain, on average, 1.91% in the short term.

After the first year companies released diversity reports, the stocks didn’t react much at all, which Neale attributed to the fact that the demographics hadn’t changed much. “Their bad news has already been priced into the stock,” Neale said.

Next, the researchers turned their attention to the banks and financial firms. The researchers used data 50 financial institutions shared with the Financial Times in 2017. The big banks looked more equal than the tech companies: Women made up 54.4% of employees at JPMorgan Chase, according to the report; Bank of America was split about equally. Companies without a retail presence, like Morgan Stanley, are more lopsided.

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