Business Wealth and the Composition of Ownership Teams in New Firms: The Role of Homophily and Diversity

Abstract

Although there is a growing body of research that suggests a positive association between racial diversity and positive business outcomes, there is a long-standing literature on homophily—the general tendency for individuals in organizations to associate and bond with similar others. But do business organizations benefit from either diversity or homophily? This paper investigates this question. Using data from a nationally representative sample of more than 1,700 business startups from the Kauffman Firm Survey, the multivariate analysis examines the relationship between the diversity or homophily of the founding ownership teams of business startups and their net worth (wealth). The analysis shows that, net of firm characteristics and human capital characteristics, startups with racially diverse founding teams have higher net worth than their homophilous counterparts. The implications of these findings are explored.