October 23, 2019

When companies improve their diversity, stock prices get a boost

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In 2014, the big U.S. tech companies did something surprising: They told the world how few women they employed. Men comprised 70% of Google’s workforce; Facebook, Apple, and Twitter looked similar. The mix was even more lopsided in more senior leadership and technical roles.

Most of the business world has come to believe that workforce diversity is good for the bottom line, and tech companies hoped their new transparency would lead to more equality. It didn’t. But new research suggests that investors were paying attention.

In a study published today by the Stanford Graduate School of Business, researchers there and at Northwestern found that share prices jumped when companies reported better-than-expected gender diversity; they fell when firms announced demographics that underwhelmed. The same pattern held when the academics turned their attention to finance companies. A lab experiment demonstrated the same trends, and participants reported a handful of beliefs that explained why they were more likely to invest in companies with more gender diversity.

Google was the first to release its figures, and after accounting for other factors, the researchers calculated that the company’s stock fell 0.39 percentage points on the news. They projected that if Google had reported that women made up 31% of its workforce, instead of 30%, it could’ve added $375 million in market value. “This is a huge response,” said Margaret A. Neale, one of the researchers and a distinguished professor at Stanford.

They also used Google as a benchmark to see how the market reacted when firms reported more or less diversity compared with an industry leader. The stock price was “affected strongly” by how companies looked compared to Google, they found. A tech firm whose workforce was 1 percentage point more diverse than Google’s saw shares gain, on average, 1.91% in the short term.

After the first year companies released diversity reports, the stocks didn’t react much at all, which Neale attributed to the fact that the demographics hadn’t changed much. “Their bad news has already been priced into the stock,” Neale said.

Next, the researchers turned their attention to the banks and financial firms. The researchers used data 50 financial institutions shared with the Financial Times in 2017. The big banks looked more equal than the tech companies: Women made up 54.4% of employees at JPMorgan Chase, according to the report; Bank of America was split about equally. Companies without a retail presence, like Morgan Stanley, are more lopsided.

The researchers found companies with greater gender diversity saw shares rise relative to companies that reported having fewer women, the same trend they saw in the tech industry.

The initial findings didn’t explain why investors reacted positively to companies with more gender balance, so the researchers devised a third lab study to try to parse the reasons. In it, they simulated the diversity report experiment, giving a dollar to participants to invest in companies based on their diversity announcements. As they’d observed in finance and tech, participants were more willing to invest in companies with more gender equality.

When they measured participants’ existing ideas about diversity, they found investors’ interest in companies with more gender equality was based in beliefs that those companies are more likely to innovate, less likely to attract negative regulatory attention and less likely to settle lawsuits, among other beliefs.

Considering the market benefits, the researchers conclude that organizations are systematically under-investing in gender diversity. Despite public commitments, these figures haven’t budged since companies started publicly reporting. This year, Google said women made up 31.6% of its company, up just 1.6% from five years ago.

“People are not confused. They know the population of women is greater than 30%,” Neale said. “If Google moved up to 40%, there would be champagne toasts.”

© Copyright 2019 Bloomberg News. All rights reserved.

For more on this story go to: https://www.newsmax.com/finance/investinganalysis/companies-diversity-stock-price/2019/09/17/id/933004/?ns_mail_uid=6952f1f9-507d-4a20-8cc0-0a1db158d76e&ns_mail_job=DM53189_09172019&s=acs&dkt_nbr=010502q949bk

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