Diversity, Equity, and Inclusion has low correlation with gender and ethnic diversity in the boardroom, in senior management, and within the workforce; DEI exhibits no link with future stock returns

Diversity, Equity, and Inclusion. Alex Edmans, Caroline Flammer & Simon Glossner. NBER Working Paper 31215. May 2023. DOI 10.3386/w31215

Abstract: This paper measures diversity, equity, and inclusion (DEI) using proprietary data on survey responses used to compile the Best Companies to Work For list. We identify 13 of the 58 questions as being related to DEI, and aggregate the responses to form our DEI measure. This variable has low correlation with gender and ethnic diversity in the boardroom, in senior management, and within the workforce, suggesting that DEI captures additional dimensions missing from traditional measures of demographic diversity. DEI is also unrelated to general workplace policies and practices, suggesting that DEI cannot be improved by generic initiatives. However, DEI is higher in small growth firms and firms with high financial strength. DEI is associated with higher future accounting performance across a range of measures, higher future earnings surprises, and higher valuation ratios, but demographic diversity is not. DEI perceptions among professional workers, such as R&D employees, are significantly correlated with the number and quality of patents. However, DEI exhibits no link with future stock returns.

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We also study future innovation performance, since one of the main financial arguments for DEI is that it allows for a broader consideration of perspectives and stimulation of ideas which, in turn, may be driving increased innovativeness and financial performance. We find that DEI is unrelated to either the number of future patents or patent citations. However, the granular nature of our data allows us to stratify the survey responses by job category. We find that DEI perceptions of professionals, a job category that includes R&D staff, are positively and significantly correlated with both innovation measures, but there is no positive link with the responses from the three other categories: executives, managers, and hourly workers. This is consistent with the fact that innovation is most likely to stem from professionals.

Finally, we study future stock returns. Somewhat surprisingly, given prior results on profitability, innovation, and earnings surprises, we find no link between DEI and stock returns, after controlling for either firm characteristics in firm-level regressions or risk in portfolio regressions.