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Many of the biggest companies have wholeheartedly embraced the theory that more diversity means more profits. Investors may be less convinced—at least when it comes to adding women to boards.

An analysis of 14 years of market returns across about 1,889 companies finds that when they appointed female directors, they experienced two years of stock declines. The market value of a given company fell 2.3% by adding one additional woman. The research was published in the Informs journal Organization Science.

Shareholders penalize these companies, despite the fact that increased gender diversity doesn’t have a material effect on a company’s return on assets, said Kaisa Snellman, an assistant professor of organizational behavior at INSEAD business school and a co-author of the study.

“Nothing happens to the actual value of the companies,” she said. “It’s just the perceptions that change.”

A portion of the study conducted by Snellman and her co-author from INSEAD suggests investor biases are at play. The researchers asked senior managers with MBAs to read fictional press releases announcing new board members. The statements were identical, except for the gender of the incoming director. Participants rated those hiring men as more likely to care about profits and less about social values and those hiring women as “softer,” Snellman said.

“If anyone is biased, it is the market,” she said. In fact, Snellman said investors should consider organizations that add women and other under-represented groups to their boards “because there's a good chance that company is being undervalued.”

Over the years, various non-academic reports have suggested that diverse leadership results in corporate success. A McKinsey & Co. analysis noted that board diversity correlates with positive financial performance, if not in a statistically significant way. Credit Suisse Group AG noted a “performance premium for board diversity” in its 2019 report.

Such findings have prompted such investors as BlackRock Inc. and State Street Global Advisors to pressure companies to add women to their boards. Women now make up more than a quarter of directors on the S&P 500 and 20% of boards globally.

But most of these analyses don’t prove that increased diversity leads to higher returns or profit margins. “It has become kind of a myth,” Snellman said: “Add a woman on your board, and a company starts doing better.”

To see whether any direct links between diversity and company performance exist, academics such as Snellman have looked to stock prices. The research has, so far, found mixed results.

One analysis from September determined that share prices jumped after companies released reports that showed better-than-average levels of gender diversity. Another published in October found that investors penalized companies without female directors after California passed a law mandating that all boards in the state must have at least one woman by the end of this year. The researchers suspected the market was reacting to the burden of compliance for organizations that didn’t already have board diversity.

Looking at financial performance, rather than market value, many studies conclude that increasing representation results in neither significant benefit nor harm. Snellman counted 140 papers that show no clear relationship between adding diversity at any level with improving performance metrics of any kind.

“Just to be very clear, I'm not saying that we should not promote female leaders into senior leader positions,” Snellman said. “But is there a business case for gender diversity on boards? If you ask an academic, the answer is no.”