Diversity in Upper Echelons and Firm Performance

Gurdeep Singh Raina

doi:10.7273/000005348

This three-essay dissertation investigates how diversity in organizational upper echelons impacts its performance outcomes. The first essay explores the relationship between gender composition on the board of directors and the gender pay gap in the top management teams. Using data from 2658 firms, I find that gender composition on the board of directors has an inverted-U relationship with the gender pay gap in top management teams. I also find that the gender pay gap in top management teams increases up to a certain proportion of women board members and then decreases. The inflection point is around 14.6% of women on the board. Interestingly, under a female CEO, the women members of the top management teams earn more and the gender gap in that group becomes negative, i.e., women team members earn more than their male counterparts. The second essay investigates the differential impact of CEO dismissal on abnormal returns based on CEO gender. I use data from 4130 CEO exit announcements, including 2567 voluntary and 1036 involuntary exits (dismissals). I begin with integrating the insights from the "investor sentiment perspective,” and “resource-based view and role congruity theory” to develop a theoretical framework. These integrated insights suggest that 1) investors might react differently to the dismissal announcements of female CEOs, specifically those dismissed for reasons related to misconduct because social congruity-related expectations posit women getting perceived as more moral and ethical than men; thereby female CEOs being held at a higher ethical and moral standing than their male counterparts, and 2) any incongruity between the expected and actual behavior in the ethical and moral domain by women leaders would unearth biases against them strongly making them and their affiliations (e.g., firm) face relatively severe penalties because of the relatively higher decline in investor confidence, firm value, and firm reputation. I find that the investors indeed react negatively to the dismissal of female CEOs who are dismissed for reasons of misconduct. The third essay studies the relationship between gender composition on the board of directors and its impact on the cost of innovation. While prior research has examined the importance of having a gender-diverse board on organizational innovation, much less focus has been given to understanding the relationship between a gender-diverse board and innovation cost efficiency. Moreover, the role and importance of innovation sub-committees in influencing the relationship between a gender-diverse board and innovation cost efficiency has received significantly less attention. Drawing on the upper echelons theory I propose that a gender-diverse board is associated with innovation cost efficiency in organizations and that the innovation sub-committee will moderate the relationship between a gender-diverse board and innovation cost efficiency. Utilizing data from 1812 public companies in the U.S. between 2000 – 2020, I find that a gender-diverse board significantly improves innovation cost efficiency and that the innovation sub-committee moderates the relationship between a gender-diverse board and innovation cost efficiency. Overall, a gender-diverse board and innovation sub-committee were found to be beneficial for improving innovation cost efficiency in organizations.

Diversity in Upper Echelons and Firm Performance

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