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Do Investors Value Diversity?

On August 5, 2017, a memo titled “Google’s Ideological Echo Chamber” described by some observers as an “anti-diversity screed” went viral. Here's how it played out and shook up Silicon Valley. 

The memo, written by a software engineer then working at Google, argued that “the distribution of preferences and abilities of men and women differ in part due to biological causes and that these differences may explain why we don’t see equal representation of women in tech and leadership.”

Therefore, he argued, Google’s high-profile efforts to increase diversity may be misguided and might be harming, rather than helping, the company. But Google’s leadership disagreed. One of Google’s vice presidents issued a direct response to the memo, stating, “We are unequivocal in our belief that diversity and inclusion are critical to our success as a company, and we’ll continue to stand for that and be committed to it for the long haul.” This example brings to the forefront of popular attention a key research question in organizational behavior: Is there a business case for diversity in organizations?

In a study I conducted with Jennifer E. Dannals and Margaret A. Neale at Stanford and Thomas Z. Lys at Kellogg, we examine whether investors value demographic diversity by investigating how investors react to diversity information revealed by Silicon Valley technology firms. Until recently, the diversity levels of nearly all technology firms in Silicon Valley were not disclosed and were actually considered “trade secrets.”

However, in May-July 2014, a striking series of diversity announcements was released by Google and other companies. Google’s diversity announcement revealed, for the first time, the company’s racial and gender diversity levels, which were surprisingly low: 30% women, 2% Black, and 3% Hispanic. Indeed, the press commented at the time that Google’s diversity levels were “too low and strikingly below other industry averages.” After Google released its diversity announcement, several other firms followed suit by releasing diversity announcements of their own.

Is Diversity Valued in Silicon Valley?

The technology organizations in Silicon Valley offer a particularly interesting domain in which to study diversity. Previous research suggests that diversity is most likely to be beneficial in settings where innovation and creativity are particularly important. Therefore, one might expect the beneficial effects of diversity to be most likely observed in technology firms, especially those associated with Silicon Valley, which rely so heavily on innovation. Research suggests that diversity can lead people to search for novel information and perspectives, leading to better decision making and problem solving. Thus, if there were a business case for diversity, one might expect Silicon Valley to be among the places where diversity is valued most.

However, both the public press and academic literature suggest that technology firms are very difficult places for women and/or underrepresented racial minorities to work. The stereotypical employee in science, technology, engineering and mathematics (STEM) fields in the United States is a white man. And research suggests that, at every turn, technology firms signal to women and underrepresented racial minorities that they do not belong and are not valued. Such psychological forces contribute to lower female participation in STEM fields and may exacerbate the potential for harmful conflict and uncertainty. As such, one could also expect Silicon Valley to be among the places where diversity is valued least.

Our research uses an event study approach to estimate the financial impact of each of the diversity announcements on the relevant company, as measured by effects on their stock returns. We estimate Google’s announcement of surprisingly low diversity caused a significant valuation loss of US$1.78 billion. Additionally, announcements of unsurprising diversity levels (i.e. same as Google) caused no significant valuation change, and announcements of surprisingly high diversity (i.e. more than Google) caused significant valuation gains.

Thus, our results show a consistent pattern: lower diversity is associated with a negative stock market reaction and higher diversity is associated with a positive stock market reaction. Taken together, this suggests that investors view diversity as important to the financial performance of these companies. Our findings offer plausibly causal field evidence that major technology companies can gain substantial financial benefits from increasing diversity.


Why do investors think there is not enough diversity in technology firms? There are several possibilities. First, managers may be biased against hiring women and underrepresented minorities. Second, managers may be undervaluing the internal benefits of diversity (such as better creativity) and/or the external benefits (such as an improved reputation with a diverse consumer base, or fewer discrimination lawsuits). Third, diversity could be too low because there is a relatively low labor supply of qualified women and minority applicants for roles in the technology sector.

In any case, our results show that, from the perspective of investors, increasing diversity would improve the performance of Silicon Valley technology companies. Our findings may also have implications beyond the technology sector. The “value in diversity” perspective suggests that the critical feature underlying the positive value investors assign to diversity may be the technology sector’s heavy reliance on innovation. So, in other domains where successful performance depends not on quick consensus but on innovative solutions to complex problems, investors may also value more diversity.

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