Two Essays on the Impact of Workforce Diversity on Firms Performance

This dissertation comprises two essays exploring the impacts of workforce diversity on firms' operational performance. I define workforce diversity as the mix of employees from different ethnic/racial background (ethnic diversity) and different gender (gender diversity) in a firm's workforce. I gather and analyze firms' annual diversity reports (EEO-1 reports) to estimate the level of workforce diversity in S&P 500 firms. In the first essay of my dissertation, "The impact of Workforce Diversity on Labor Productivity and Investment Efficiency", I deconstruct labor productivity (ratio of total revenue over the total number of employees) into labor efficiency (ratio of total revenue over total employee cost) and average labor cost (ratio of total employee cost over the total number of employees) to analyze firms' labor-related operational effectiveness. I estimate firms' investment inefficiency as the residual of a regression predicting firms' total investment based on sales growth, investment opportunity, and internal financing capabilities. I find that firms with a more diverse workforce have higher labor productivity. However, different aspects of diversity, gender diversity or ethnic/racial diversity, have different impacts on firms' labor efficiency and average labor cost. Moreover, I find that ethnic diversity among the manager and higher-ranked employees drive firms' investment efficiency. Together, the results suggest that workforce diversity positively influences firms' operational performance. In the second essay, "The impact of Workforce Diversity on Corporate Innovation and Financial Performance", I measure innovation using research and development (R&D)expenditures scaled by total assets, the number of new patents generated, the total citations associated with new patents, and the total stock market value of the new patents. I estimate firms' financial performance using Tobin Q, market-adjusted average monthly stock returns, and market-adjusted annual stock return. I find that firms with a more diverse workforce have higher levels of innovation, both in terms of innovation input (R&D), output (new patents generated), and quality (patent citations and market value of new patents). Further analysis shows that only ethnic diversity increases firms' innovation, while gender diversity negatively impacts innovation in a few areas. Similarly, I find firms with a higher level of ethnic diversity, especially at the manager level, have higher financial performance. Together, the results suggest that workforce diversity positively influences firms' innovation and financial performance, providing evidence to support the cognitive resource diversity theory.