Do Investors Value DEI?

In recent years, corporate diversity, equity, and inclusion (DEI) initiatives have become a heated debate in boardrooms and beyond. While many companies have embraced these efforts, investors have started to question whether DEI initiatives are truly valuable or merely a costly distraction from core business activities, as Elon Musk argued in several viral social media posts in 2024. This raises a critical question: Do investors collectively value corporate DEI efforts? If not, firms may have promoted DEI against their investors’ wishes. In a new study, I leverage a unique policy change in Florida to shed light on this issue.

In 2022, Florida enacted the Stop WOKE Act, a first-of-its-kind law that restricts DEI initiatives in the workplace. This unexpected policy shift created a natural experiment to examine how the stock market reacted to news about a restriction on corporate DEI efforts.

The results were striking. When the act was announced, Florida-based companies saw their stock prices fall by 1.80 percentage points [61% annualized] more than similar companies elsewhere in the US. The effect was economically significant, equivalent to about $96 million for an average public company in Florida, and larger than the average market reaction to the sudden death of a firm's CEO. Moreover, this reaction persisted for months after the initial announcement.

To ensure robustness, researchers conducted additional tests, looking at different time windows, alternative definitions of affected companies, and controls for various firm characteristics and industry trends. The results held strongly, bolstering confidence in the main conclusion: Investors, on average, place a positive value on corporate DEI initiatives.

But why do investors care about DEI? The study explores three potential explanations: intrinsic value for companies, support from key stakeholders, and investors' pro-social preferences. Interestingly, the data suggests that investor preferences play the strongest role. Companies whose investors displayed stronger pro-social tendencies experienced a more pronounced negative reaction to the Stop WOKE Act. There was also evidence supporting the intrinsic value of DEI, particularly in industries where diversity issues are considered financially material.

The researchers considered many alternative explanations, examining other concurrent events, compliance costs, and potential reactions to the act's impact on education rather than business practices. None of these explanations held up to scrutiny.

A compelling piece of evidence came in August 2022, when a federal judge temporarily halted enforcement of the Stop WOKE Act. The affected Florida companies saw a boost in their stock prices, further supporting the idea that investors value DEI initiatives.

While the study shows a positive average effect, the impact of DEI initiatives may not be uniform across all companies. Smaller firms experienced a more pronounced negative reaction to the act, suggesting that larger companies might be better positioned to weather such policy changes.

The study contributes valuable insights to ongoing debates about corporate social responsibility and environmental, social, and governance (ESG) investing. It provides concrete evidence that, at least in the case of DEI, these initiatives are not merely window dressing but something that the average investor truly cares about. This has important implications for corporate leaders as they weigh the costs and benefits of DEI programs.

As society continues to grapple with issues of diversity and inclusion, the study offers a rare setting to examine how the market views corporate DEI efforts. It suggests that, far from being a drag on shareholder value, well-implemented DEI initiatives might actually be a source of competitive advantage in the eyes of investors. For business leaders and policymakers alike, these findings provide food for thought as they navigate the complex landscape of corporate social responsibility in the 21st century.

Hoa Briscoe-Tran is an Assistant Professor of Finance at the University of Alberta, Canada.

A similar version of this post was featured on Columbia Law School’s Blue Sky Blog.

It is based on the author’s recent article, ‘Do investors value DEI? Evidence from the Stop WOKE Act,’ available here.