Does Workforce Diversity Predict Firm Performance?

This paper provides evidence on the link between public firms’ employee diversity and future firm performance. It documents that employee ethnic diversity predicts one-year ahead returns and accounting performance. Although diversity predicts greater future earnings, cash flows, and innovation, it is also linked with greater stock price volatility and lower employee productivity. The relationship between employee diversity and stock returns is concentrated among firms with low levels of diversity, suggesting limits to benefits from increasing diversity. Overall, this study provides initial evidence on costs and benefits of firm-wide diversity.