The relationship between employee diversity and stock performance

Relationship

Here’s a note from Alex Edmans:

Most studies on diversity focus on the boardroom, because that’s where the data is easiest to gather. A new paper, just accepted for publication in Financial Management, studies diversity in the workforce, extracting demographic data from employee profiles and resumes from online sources such as LinkedIn.

The authors find that demographic diversity does not lead to outperformance, regardless of whether (a) diversity is measured using gender, ethnic, or age diversity; (b) performance is measured using return on equity, gross profit, or labor productivity; (c) the methodology uses portfolio sorts or cross-sectional and panel regressions.

Kudos to the authors, Bart Frijns, Alexandre Garel, and Shushu Liao for bringing novel data and robust analysis to explore an important question and the journal editors for being willing to publish a non-result paper. Many journals have a strong tendency to publish papers with signficant results (which in turn creates incentives to data-mine). But finding that two variables are unrelated – particularly when many people claim a strong positive link – can also be a significant contribution to knowledge.

Note that the paper does not mean that DEI initiatives are bad. Other measures of DEI, which capture cognitive diversity, or focus on equity and inclusion, may find a positive link to performance. And a company might pursue demographic diversity for non-performance reasons. But it does highlight how the plethora of practitioner studies, Harvard Business Review articles and Forbes blogs claiming a clear positive link between demographic diversity and performance may not be correctly conveying the truth.