Much has been made in recent years of studies showing that diverse businesses perform better: hire women and minorities, they argue, and reap the rewards in your bottom line. Yet many of these studies share a common problem. They show correlation between diversity and business performance, but they don’t demonstrate that diversity is the reason these businesses perform better.
Now, a new study by Harvard researchers cleverly tackles this problem with a research design that makes it possible to estimate the causal impact of gender diversity. The researchers — Harvard Business School professor Paul Gompers and Harvard economics PhD student Sophie Wang — compared venture capitalists who have daughters with those who do not.
They found that raising daughters made partners much more likely to hire female partners to their firm. And improved gender diversity in turn improved firms’ financial performance.
The finding is consistent with previous research on the power of daughters. For instance, fathers of daughters are more supportive of gender equality than fathers of sons, and congressmen who have daughters vote more liberally on policies affecting women.
Venture capital is a particularly male-dominated industry: Only 10 percent of new hires are women, and three-quarters of firms have never had a senior female investor, according to the data. But the researchers found that when a daughter replaced a son for senior partners, the probability of hiring a senior female investor increased by 24 percent.
Firms in which partners had more daughters than sons had a 3 percent higher probability of succeeding — measured by their startups going public or being acquired for more than the amount invested. For these firms, the rate of return for funds also increased 3 percent. (Researchers controlled for factors such as firm size and age.)
So how, exactly, does gender diversity lead to better results in venture capital?
The most obvious explanation is that raising daughters reduces bias toward women, leading to more female hires, say researchers. Because the pool of female talent is relatively untapped, these hires may be of significantly higher quality than their male peers. They drive firms to generate higher returns.
It is also possible that firms’ improved performance is a result of having more diverse perspectives at the table to make investment decisions. Venture capital, like other industries, suffers from a “birds of a feather” phenomenon: Investors tend to collaborate with those who share the same gender, ethnicity, educational background and work history as themselves. But such collaboration has been shown to reduce financial performance. Researchers think greater diversity diminishes the tendency toward groupthink and helps firms avoid costly investment mistakes. Women’s different networks may also attract a wider range of deals, increasing average deal quality.
The findings are relevant for professions well beyond venture capital. But a word of caution: This isn’t a fake-it-till-you-make-it scenario. Imposing gender quotas to increase diversity won’t have the same effects, researchers warn. The benefits to business come from the “genuine removal of biases.” The best formula? Raise a daughter.
Elizabeth Winkler is a freelance journalist who writes about economics and finance.