Does the Stock Market Fully Value Inventor Diversity? Gender and Ethnic Diversity among Inventors and Stock Returns
Posted: 13 Jan 2020
Date Written: November 13, 2019
We find that firms with diverse inventors have significantly superior stock returns than firms with more homogeneous inventors. Specifically, we analyze the relationship between gender and ethnic diversity of firm inventors, inventor diversity (ID), and future stock returns. A long-short value-weighted portfolio of firms, ranked on ID, earned a four-factor alpha of 4.32% per year. The results are robust to controlling for known risk factors, firm characteristics, industry dummies, and weighting methodologies. The evidence suggests that the market does not fully price inventor diversity. Inventor diversity is also positively associated with future operating performance and future innovation. Consistent with the mispricing hypothesis, we find that the ID-return predictive power is stronger for firms with low investor attention, high valuation uncertainty, and for firms in industries with more competition for products, innovation, or labor. We also find that firms with greater ID are associated with larger future earnings surprises and higher cumulative abnormal returns around subsequent earnings announcements. Our results highlight the importance of inventor diversity for firms and have important implications for regulators and investors as we document that the market underreacts to inventor diversity.
Keywords: Diversity, Stock Returns, Innovation
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