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

An analysis of 14 years of market returns across about 1,889companies finds that when organizations appointed femaledirectors, they experienced two years of stock declines.The market value of a given company fell an average of 2.3 percentafter it added one additional woman. The research waspublished in the Informs journal OrganizationScience.

Shareholders penalize these companies, despite the fact thatincreased gender diversity doesn't have a material effecton a company's return on assets, said Kaisa Snellman, anassistant professor of organizational behavior at INSEAD businessschool and a co-author of the study.

"Nothing happens to the actual value of thecompanies," she said. "It's just the perceptions thatchange."

A portion of the study conducted by Snellman and herco-author from INSEAD suggests investor biases are atplay. The researchers asked senior managers withMBAs to read fictional press releases announcing new boardmembers. The statements were identical, except for the gender ofthe incoming director. Participants rated those hiring men as morelikely to care about profits and less about socialvalues and those hiring women as "softer,"Snellman said.

"If anyone is biased, it is the market," shesaid. In fact, Snellman said, investors shouldconsider organizations that add women and otherunder-represented groups to their boards "because there'sa good chance that company is being undervalued."

Over the years, various non-academic reports have suggested thatdiverse leadership results in corporate success. AMcKinsey & Co. analysis noted thatboard diversity correlates with positivefinancial performance, if not in a statistically significant way.Credit Suisse Group AG noted a "performance premium forboard diversity" in its 2019 report.

Such findings have prompted investors like BlackRockInc. and State Street Global Advisors topressure companies to add women to their boards. Womennow make up more than a quarter of directors on theS&P 500 and 20 percent of boardmembers globally.

But most of these analyses don't prove that increased diversityleads to higher returns or profit margins. "Ithas become kind of a myth,"Snellman said: "Add a woman on your board, and acompany starts doing better."

To see whether any direct links between diversity andcompany performance exist, academics such as Snellman have lookedto stock prices. The research has, so far, found mixedresults.

One analysis fromSeptember determined that share pricesjumped after companies released reports that showedbetter-than-average levels of gender diversity.Another published in Octoberfound that investors penalized companies without femaledirectors after California passed a law mandatingthat all boards in the state must have at least one woman by theend of this year. The researchers suspected the market wasreacting to the burden of compliance for organizations that didn'talready have board diversity.

Looking at financial performance, rather than market value, manystudies conclude that increasing representation results inneither significant benefit nor harm. Snellmancounted 140 papers that show no clearrelationship between adding diversity at anylevel with improving performance metrics of any kind.

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

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