Executive diversity—a powerful predictor of stock returns

January 19, 2016, Tilburg University

A new paper from Tilburg University, 'Diversity Investing', provides more evidence supporting the case for diverse executive teams. Between 2002 and 2014, US firms whose management teams were more diverse, in terms of personal characteristics and experience, significantly outperformed less diverse peers in terms of risk-adjusted returns.

The authors maintain that their measure of captures more dimensions of diversity than studies that focus on one or a few dimensions, such as tenure, ethnicity, gender or pay.

Using a new dataset on more than 50,000 top executives in US firms from 2002 to 2014, Tilburg University researchers Manconi, Rizzo, and Spalt show that top management team diversity—a new text-based measure of how diverse managers are in terms of and prior experiences—matters for . Firms with diverse have significantly higher risk-adjusted returns than firms with homogenous management teams.

A long-short strategy on the diversity characteristic yields higher risk-adjusted returns, and higher Sharpe ratios, than most leading asset pricing anomalies over our sample period. Diversity returns are driven by large-cap stocks and the long leg of the strategy, so diversity investing seems feasible for investors. Additional results suggest the large returns to diversity investing are due to (i) diversity being a new dimension of "quality" stocks and (ii) mispricing.

Explore further: Belief in higher returns from private equity may be misplaced

More information: Alberto Manconi et al. Diversity Investing, SSRN Electronic Journal (2015). DOI: 10.2139/ssrn.2706550

Related Stories

Ethnic diversity reduces risk of market bubbles

November 18, 2014

If they consider it at all, investors likely regard ethnic diversity as a matter of social policy. But new research by an MIT Sloan professor suggests a much more practical reason to consider diversity: compared to markets ...

Diversity may reduce our reliance on fertiliser

January 14, 2016

Ecologists have, for the first time, teased out the many interacting factors that explain why species diversity and productivity vary so greatly between different grassland ecosystems across the globe.

Bottom line may be boosted by diversity at the top

September 10, 2010

Racial diversity at a corporation's top ranks may be good for business, according to new research conducted by a School of Management professor. Results from Dr. Orlando Richard's study suggest that racial diversity at ...

Recommended for you

Growing a dinosaur's dinner

July 13, 2018

Scientists have measured the nutritional value of herbivore dinosaurs' diet by growing their food in atmospheric conditions similar to those found roughly 150 million years ago.

A statistical study of the hot streak

July 12, 2018

An international team of researchers has conducted a statistical analysis of hot streaks to learn more about this mysterious facet of human nature. In their paper published in the journal Nature, the group describes how they ...

Study finds solos twice as common in sad songs

July 11, 2018

Music can transport a spirit from sullen to joyful. It can bring a concertgoer to unexpected tears. But the details of just how that connection between performance and emotion works remain largely mysterious.

0 comments

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.