What is the Value of Workforce Diversity?

Abstract

This study examines whether the market is able to accurately assess the value of intangible assets such as human capital, especially its level of diversity. Using new measures of diversity among non-executive employees, I show that non-executive diversity has a strong relation with corporate innovation, a key long-run investment, but it does not have a strong impact on short-run corporate performance. The employee diversity-firm performance relation is stronger when middle-tier managers are more diverse. The market does not fully recognize the value of minority employees, potentially because it focuses more on short-term outcomes. During the 1990- 2021 period, a trading strategy that exploits market mis-valuation earns an annualized risk-adjusted return of over 7%.