When and Why Do Investors “Reward” Organizations for Gender Diversity? The Moderating Role of Diversity Frictions

Abstract: We examine when and why investors “reward” organizations for gender diversity, across a field quasi-experiment and four pre-registered experiments. We theorize that in contexts where inefficient diversity frictions (e.g., hiring biases or hostile work environments) distort gender diversity downwards, news that a firm has high (vs. low) gender diversity levels is a sign the firm suffers less from frictions and is thus likely to achieve better future performance, leading investors to revise their beliefs and valuations in a positive direction. Consistent with our theory, we show that investors value firm gender diversity, especially in contexts where diversity frictions are stronger (technology vs. finance sector, upper-level vs. lower-level roles, anti-woman vs. anti-man hiring biases), because investors believe it is a cue that a firm is more creative, less exposed to legal risks, and a more ethical investment. If firms had more gender diversity, investors would likely “reward” them with higher valuations.

Keywords: gender diversity, diversity frictions, quasi-experiment, laboratory experiment