Employee diversity and litigation risk: Evidence from the Lilly Ledbetter Fair Pay Act

Abstract We examine the valuation effects of the Lilly Ledbetter Fair Pay Act, which increases potential litigation over discriminatory compensation. Firms with relatively fewer women exhibit significant 3‐day abnormal returns of −0.61% around the passage of the Act, whereas firms with more women show no effect. Low‐female firms also display larger increases in implied cost of capital and larger decreases in expected cash flow than high‐female firms. No significant differences emerge based on racial diversity. Results suggest that investors perceive increased litigation risk and imply that firms in industries with higher gender pay gaps could increase value by reducing the pay gap.