Is the Stock Market Biased Against Diverse Top Management Teams?

Abstract

Using a novel text-based measure of top management team diversity, covering over 70,000 top executives in over 6,500 U.S. firms from 1999 to 2014, we show that analyst forecasts are systematically more pessimistic for firms with more diverse top management teams ("diverse firms"), especially for inexperienced analysts. Institutional investors, especially if located in conservative areas, are less likely to hold diverse firms, even though diverse firms do not exhibit inferior returns. Consistent with downward-biased expectations, abnormal returns on information-release days are systematically positive for diverse firms. Combined, our results suggest stock markets are biased against diversity in top management teams.

Keywords: Biased Expectations, Top Management Teams, Diversity

JEL Classification: G32, G34, M14