The Market Value of Pay Gaps: Evidence from EEO-1 Disclosures

We exploit the release of Type 2 EEO-1 forms by the Department of Labor for over 11,000 public and private U.S. contractors to estimate gender and race/ethnicity pay gaps. These forms contain standardized detailed demographic breakdowns of companies' workforces by ten job categories. Using EEOC pay data alongside these forms, we estimate that public firms save, on average, over $49 million a year by including women and minorities in their workforce. Private firms, which generally are smaller, save almost $6 million a year. In relative terms, private firms have larger pay gaps than public firms, and for all firms, the pay gap increases with firm size. Pay gaps vary dramatically across industries, and they are associated in ways consistent with labor economics theory. We further exploit the public release of EEO-1 forms by examining the market reaction to this release, conditional on the size of the firm's pay gap. Pay gaps lower labor costs, thus increasing net income and potentially firm value. On the other hand, systematic pay inequities can lower employee satisfaction, potentially hurting firm value. We present strong and consistent evidence that investors view pay gaps as net value-enhancing. Our results hold after controlling for workplace diversity, the IO structure of the firm, state, industry and other effects. Our findings should inform stakeholders about the size, determinants, and perceived value of pay gaps. They also suggest that capital markets may not be the appropriate avenue to address systematic pay inequities in the U.S.