Do Diversity Reputation Signals Increase Share Value?

• Published date: 01 December 2014
• Author: Christy Glass,Alison Cook
• DOI: http://doi.org/10.1002/hrdq.21183
• Date: 01 December 2014

HUMAN RESOURCE DEVELOPMENT QUARTERLY, vol. 25, no. 4, Winter 2014 © 2014 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com) • DOI: 10.1002/hrdq.21183 471

Do Diversity Reputation Signals

Increase Share Value?

Alison Cook and Christy Glass

This analysis contributes to the ongoing scholarly debate regarding the

relationship between fi rms’ efforts to promote diversity and fi nancial

performance. Most research contributing to this debate focuses on specifi c

efforts of fi rms, such as progressive human resource policies and leadership

personnel changes, on fi rm-level outcomes. Much less research focuses on

the impact of reputational signals on performance. However, we argue

that reputation signals may provide an even stronger test of the impact

of diversity efforts on performance. We analyze the impact of diversity

awards, which recognize companies at the forefront of progressive human

resource policies, on share value. We use event study methodology to test

hypotheses derived from signaling theory to predict investors’ reaction

to the announcement of diversity awards. Overall, we fi nd that diversity

award recipients are rewarded for these efforts by a signifi cant increase in

share price. Our research lends support to the business case for diversity

by demonstrating that investors interpret diversity reputation signals as

contributing to fi r ms’ fi nancial value. Further implications of these fi ndings

for corporate decision makers, policy makers, and scholars are discussed.

Key Words: diversity, reputation signals, shareholders, share price, event

study methodology, signaling theory

Corporate decision makers increasingly view diversity as vital for improv-

ing competition and advancing a broad range of organizational goals, and

many companies have begun pursuing a variety of human resource develop-

ment efforts aimed at promoting organizational diversity (Dolezalek, 2005;

Hite & McDonald, 2010; Wentling & Palma-Rivas, 2000). Corporate promo-

tion of diversity has been encouraged by pressures to advance fairness and

The authors contributed equally to this manuscript. For convenience they are listed in alphabetical

order.

472 Cook, Glass

HUMAN RESOURCE DEVELOPMENT QUARTERLY • DOI: 10.1002/hrdq

equality in the workplace from a variety of stakeholders, including clients

and customers, industry consultants, human resource managers, current and

potential employees, policy makers, and the public at large (Cook & Glass,

2011; Edelman, Fuller, & Mara-Drita, 2001; Hardy-Fanta & Stewartson,

2007; Kelly & Dobbin, 2001). However, relatively little research to date has

focused on whether and how these efforts translate into profit (Curtis &

Dreachslin, 2008).

Scholars have attempted to establish a business case for diversity, iden-

tifying a range of benefi ts of diversity including a competitive advantage in

recruiting and retaining highly skilled workers who can increase the range of

information, skills, abilities, and knowledge within the fi rm (Burt, 1992; Cox,

2001; Koonce, 2006), heightened ability to identify and meet the demands

of a diverse customer and consumer base (Cox, 1994; Sen & Bhattacharya,

2001; Wiethoff, 2004), improved managerial effectiveness, decision quality,

and problem solving (Fairfax, 2005; Jackson, 1992; McLeod, Lobel, & Cox,

1996; O’Connor, 2003; Ramirez, 2000), and an enhanced public reputa-

tion and perceived legitimacy based on progressive employment policies and

practices (Hartenian & Gudmundson, 2000; Richard, 2000; Yang & Konrad,

2011). A few scholars have measured the impact of diversity on long-term

fi rm performance (Richard, 2000), fi nding a strong correlation between gen-

der and racial diversity among managerial and leadership ranks and perfor-

mance (Frink et al., 2003; Konrad & Mangel, 2000; Perry-Smith & Blum,

2000; Richard, McMillan, Chadwick, & Dwyer, 2003; Wiethoff, 2004).

Despite this evidence, scholars continue to debate the relationship

between fi rms’ efforts to promote diversity and fi nancial performance and

much research in the fi eld lacks rigorous empirical support for conclusions

regarding the benefi ts of diversity, limiting the usefulness of this research for

organizational agents. According to Curtis and Dreachslin’s (2008) review

of the HRD literature on diversity, “the current evidence base provides lim-

ited guidance to human resource professionals as they design and implement

diversity interventions” (p. 107). Existing empirical research also tends to

focuses on the organizational outcomes of specifi c efforts, such as progressive

human resource policies, leadership personnel changes, or efforts to recruit

and retain a diverse workforce (Koonce, 2006). Much less research focuses

on the impact of reputational signals on performance. However, we argue

that reputation signals may provide a stronger empirical test of the impact of

diversity efforts on fi rm performance. Our research contributes to this debate

by analyzing the impact of diversity awards, which recognize companies at

the forefront of progressive human resource policies, on the market value of

the fi rm.

To answer our research question we develop a theoretical framework

derived from signaling theory (Spence, 1974). Signaling theory suggests ways

in which reputation-based signals (i.e., diversity awards) will be interpreted

by signal receivers (i.e., investors), thereby impacting share price. Diversity