Benefits of gender disaggregated data in investing

Lots of research has looked at whether more gender diversity increases firm performance, but David Daniels, PhD Jen Dannals Thomas Lys Margaret A. Neale look at whether investors “reward” firms with greater gender diversity through higher stock valuations. The claim is that new (emphasis on NEW) information about firms’ diversity numbers can cause changes in how firms are valued by investors, with real financial ramifications. To first show this effect, they focus on two collective disclosure “events”: technology firms that released their own diversity metrics after Google’s revolutionary initial report (between May 2014 and December 2018) and financial services firms that had their gender diversity data reported in a bombshell Financial Times article released on April 4, 2017. They looked specifically at stock prices of the firms one day after the release of this information and find that stock prices increased in response to reports that indicated that a firm had higher gender diversity. They find that “if a technology firm’s initial diversity report had revealed gender diversity numbers that were one percentage point higher, its market valuation would have increased by approximately $152 million.” Investors’ responses to financial service firms’ data were similar, although the impact was not as strong as for technology firms. But do we know that the impact is CAUSED by the revelation of gender diversity data? To address this, the researchers conducted studies on participants with investment experience and endowed them with $1. They then gave them information about a deidentified firm (Gamma Corp) that was, in fact, matched to a real firm from the sample above. To keep things simple, participants were told that the firm either had above average numbers of women, as compared to their peers in the S&P 500 vs. lower than average numbers of women. Participants were asked to predict whether Gamma Corp’s stock price had increased/decreased in response to this information, and were then given the opportunity to increase their payout by betting on their prediction by giving up some of the $1. Across several studies, participants predict that higher gender diversity results in higher stock prices and will put money behind their prediction. Moreover, the effects are driven by participants’ beliefs that the firm will be more creative, have lower legal risks, and that investment in ethical firms is a morally good thing to do. Turns out, investors think diversity is, in general, a good thing for firms to pursue. As a side note, one might wonder: what counts as diverse enough? In a footnote, the authors report that, as a result of pre-testing, “participants think that ‘above-average’ gender diversity suggests that a firm has about 52% women and 48% men, whereas ‘below-average’ gender diversity suggests that a firm has about 29% women and 71% men.”

We just published a report, and the data is clear. Gender diversity creates better fundraising momentum and unlocks capital sources that homogenous funds miss completely. Mixed gender funds raise the same amount as all male funds but reach first close faster. Female led funds work with 2.8x more female LPs. Solo female GPs represent 77% of all female funds. Yet most emerging managers still build teams like it's 1995. They optimize for comfort over performance and wonder why their fundraising stalls. The future belongs to managers who understand that inclusion drives results, not just good PR. We need to stop treating gender diversity in venture capital like charity work. This is about building better performing funds.

The Kings of Capital confirm it: there is money in gender-balance. Blackrock the worlds biggest money manager recently did a study on the impact of gender diversity on financial performance. Conclusion? more gender-balanced workforces outperformed their least-balanced peers by as much as 2 percentage points annually between 2013 and 2022. This result of one of the biggest studies ever in this space align with earlier studies for instance by McKinsey that linked gender diversity to above-average profitability. Blackrock found that the higher return on assets held true within countries and within sectors, and was especially marked for companies where gender parity was greatest in revenue producing, engineering and top-paying jobs. Companies in the middle quintile for gender balance reported an average annual return on assets of 7.7 per cent, compared with 5.6 per cent for those with the highest share of men in their workforce and 6.1 per cent for those with the highest share of women, the study found. In other words companies with workforces that are balanced between women and men achieve the best results. This study will strengthen the case of investment firms to consider gender representation and other social factors in the investment process.