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Diversity Investing

Last Updated on 10 February, 2024 by Rejaul Karim

Diversity Investing,” a research paper by Alberto Manconi, Antonino Emanuele Rizzo, and Oliver G. Spalt, explores the notable relationship between the diversity of top management teams and stock returns.

They utilize a novel text-based metric to evaluate team diversity, applying it to a sample that includes over 40,000 top executives from U.S. firms from 2001 to 2014. The researchers present a compelling case that a strategic approach, which they term “diversity investing” – buying stocks from firms boasting diverse top teams while selling those from homogenous ones – outpaces leading asset pricing abnormalities over the study period.

The paper investigates potential explanations, concluding that return expectations from diverse teams are often underestimated due to biased perceptions, thus correlating diversity with investing performance.

Abstract Of Paper

Top management team diversity matters for stock returns. We develop a new text–based measure of team diversity and apply it to a sample of over 40,000 top executives in U.S. firms from 2001 to 2014. Buying firms with diverse teams and selling firms with homogenous teams — a strategy we call “diversity investing” — outperforms leading asset pricing anomalies over our sample period on a value-weighted basis. We examine a range of possible explanations and find strong evidence for the view that analysts and investors have downward-biased return expectations on firms with diverse teams, consistent with a mispricing explanation for diversity returns.

Original paper – Download PDF

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Alberto Manconi
Bocconi University – Department of Finance; Centre for Economic Policy Research (CEPR)

Antonino Emanuele Rizzo
Nova School of Business and Economics

Oliver G. Spalt
University of Mannheim – Business School; European Corporate Governance Institute (ECGI)


In conclusion, “Diversity Investing,” conveys the significant revelation that top management team diversity influences stock returns. By formulating a novel text-based measure of team diversity and applying it to an extensive sample, the paper delivers potent evidence that “diversity investing” substantially outshines leading asset pricing abnormalities.

Insightfully, the research uncovers that analysts and investors often underestimate returns from firms boasting diverse teams, leading to a mispricing effect.

Therefore, the examination underscores the economic value of diversity within top management teams, emphasizing the remarkable power of diversity in enhancing investment potential and overall financial performance.

Related Reading:

Is There a Value Premium Among Large Stocks?

Accruals, Cash Flows, and Operating Profitability in the Cross Section of Stock Returns


What is the key finding of the research paper “Diversity Investing” regarding top management team diversity and stock returns?

The key finding is that top management team diversity significantly impacts stock returns. The authors introduce a novel text-based metric to measure team diversity and find that a strategy termed “diversity investing,” involving buying stocks from firms with diverse top teams and selling those from homogenous teams, outperforms leading asset pricing anomalies over the study period.

How does the paper define and measure top management team diversity, and what is the significance of the text-based metric used?

The paper defines top management team diversity based on a novel text-based metric. The metric evaluates diversity through textual descriptions, offering a unique way to capture the nuances of diversity within executive teams. This innovative approach allows for a more comprehensive and nuanced understanding of diversity, contributing to the robustness of the study’s findings.

What is the “diversity investing” strategy, and how does it perform compared to other asset pricing anomalies?

The “diversity investing” strategy involves buying stocks from firms with diverse top teams and selling those from homogenous teams. The strategy consistently outperforms leading asset pricing anomalies over the study period, indicating that the market tends to undervalue or underestimate the returns associated with firms that have diverse top management teams.

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