Examining the Link Between Diversity and Firm Performance: The Effects of Diversity Reputation and Leader Racial Diversity

Abstract

Given the scarcity of empirical research on the impact of diversity on organizational performance, we used longitudinal data for 100 firms to test hypotheses related to the effects of diversity reputation and leader racial diversity on firm financial outcomes. The results showed a positive relationship between diversity reputation and book-to-market equity, and a curvilinear U-shaped relationship between leader diversity and revenues, net income and book-to-market equity. Our analyses suggest that economic benefits generated from diversity reputation may primarily derive from capital rather than product markets. Further, firm performance declines with increases in the representation of racial minorities in leadership up to a point, beyond which further increases in diversity are associated with increases in performance.