Is The Stock Market Biased Against Diverse Top Management Teams?

Stock market investors are becoming increasingly vocal about the diversity of corporate leadership teams, following a global trend to engage with diversity issues at all levels of society.

The interest by practitioners in the diversity of corporate leadership teams accords well with a long-standing interest in the topic by academics. Our paper departs from much of the existing literature by emphasizing that diversity could matter for firms over and above affecting corporate decision making. In particular, we provide novel empirical evidence on how diverse top management teams are perceived in the stock market.

The core of our empirical approach is that we construct a novel text-based measure of top management team diversity – based on biographical texts executives are required to file with the SEC – which allows us to examine over 70,000 top executives in over 6,500 U.S. firms from 1999 to 2014.

Using that measure we show that analyst forecasts are systematically more pessimistic for firms with more diverse top management teams (“diverse firms”), especially among inexperienced analysts. Institutional investors, especially if located in conservative areas, are less likely to hold diverse firms, even though diverse firms do not exhibit inferior returns. Consistent with downward-biased expectations, abnormal returns on information-release days are systematically positive for diverse firms. Combined, our results suggest stock markets in aggregate are biased against diversity in top management teams.

A notable implication of our findings is that cleanly separating the impact of diversity on corporate actions from the impact of diversity on investor perceptions emerges as an essential challenge for existing and future academic work on the link between diversity and shareholder value.