How Does the Market Price Gender Diversity?

While much research has been done on gender diversity in the corporate world, it has been limited in scope due to the constraints of what companies report and the complexity of the data.

In their research paper, “Beyond Lip Service: Tracking the Impact of the Gender Diversity Gap,” data from FactSet and Realindex Investments was used to further track female representation in multiple markets for over a decade (Nash and Guido, 2022).

The excerpt below investigates on whether the positive impact gender diversity has on financial performance is fully priced by the market.  

Findings

Given that gender diversity can lead to improved operating outcomes for the firm, the question arises as to whether the market fully prices this effect into company valuations.

To investigate this, we constructed a straightforward strategy where, each month within the sample period, we take a long position in high-diversity stocks (top quintile stocks as ranked by diversity) and a short position in low-diversity stocks (bottom quintile stocks as ranked by diversity) and then observe the resulting holding period returns. We do this for both board gender diversity and senior management diversity scores. The results are presented below in Figure 18 for the period covering 2009 to 2021:

Figure 18: Spread Portfolio Performance for High Vs. Low Gender Diversity in MSCI ACWI Firms

Source: Realindex Investments and FactSet (February 1, 2009-August 31, 2021)

The results suggest that the market does not fully price the information contained in either set of diversity metrics. This is because a positive return premium can be generated by owning more diverse firms and avoiding (or in this case, shorting) low-diversity firms. Relative to investing in low-diversity firms during the sample period, investing in high-diversity firms can be shown to generate an annual return premium of 2.5% for the case of board and 4% annual return premium for the case of senior management.

By examining the performance of stock return behavior for high- and low-diversity firms across all quintiles, we can better understand the source of return premiums for board and senior management gender diversity.

To better understand the source of these return premiums, we take a closer look at the stock return behavior of high- and low-diversity firms by examining performance across all quintiles according to their senior management and board diversity scores. We then examine their average excess returns over the market (in this case, the MSCI ACWI) during the sample period. The results are highlighted in Figure 19 which shows the excess return to companies ranked by their diversity quintile.

When we look at the returns generated in this situation, we can see that higher diversity firms lead to higher returns in most cases. The performance boost delivered by diversity has not been recognized or priced in by an inefficient market.

One exception is interesting though: the firms with high-diversity boards don’t reflect the same valuation gap. Although there is an increasing positive return to more diversity in senior management, the returns for the top quintile for boards are relatively flat. We would suggest this is because board composition is so visible and the focus of so much regulation. It often becomes a matter of expectation: good firms have good boards that include women. This market expectation then gets reflected in prices.

Instead of finding diverse boards, identifying firms with more diverse senior management teams may provide greater opportunity to generate alpha.

We believe there is greater opportunity to generate alpha by identifying firms with more diverse senior management teams than there is for finding diverse boards. This is possibly because the information on management is harder to source, and therefore attracts less of a focus.

Conclusion

The conclusion we draw from this is that investors who can identify and invest in companies with higher female representation in the C-suite may not just support social equity—they may boost their investment returns as well.

Figure 19: Relation Between Return and of Gender Diversity Senior Management and the Board: MSCI ACWI Firms

Source: Realindex Investments and FactSet (February 1, 2009-August 31, 2021)

This article is an excerpt of “Beyond Lip Service: Tracking the Impact of the Gender Diversity Gap” (Nash, Guido, 2022, 31-33). For further analysis on how gender diversity interacts with various company performance and investment indicators, view the research paper in its entirety.

This blog post has been written by a third-party contributor and does not necessarily reflect the opinion of FactSet. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.