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VII. ECONOMIC EFFECTS OF AFFIRMATIVE ACTION ON ORGANIZATIONS

At issue in any discussion of the merits or drawbacks of affirmative action programs is the impact, if any, on organizations. Thus, we now turn to research on organizational performance. Two categories of organizational performance are reviewed -- measures of organizational effectiveness and measures of financial equity.

A. Organizational Effectiveness

Several studies have examined how affirmative action programs, or lack thereof, influence various measures of organizational effectiveness. In a study of manufacturing firms, Leonard (1984a) found that the percentage of woman and minorities in a firm (construed as a measure of the success of affirmative action policies) were not associated with measures of manufacturing productivity and efficiency. Lovrich, Steel, and Hood (1986) compared police departments in 65 cities that had substantially increased their percent of minority police between 1978 and 1984 to those in of 56 cities that had shown little increase. The two groups of departments were equally effective. In a study using the same procedure, Steel and Lovrich (1987) compared performance of police departments from 1970 through 1980. The found no consistent differences in performance between departments with many (N = 34) or few (N = 39) female officers.

B. Stock Prices

Hersch (1991) found that firms charged with violations of antidiscrimination laws experienced significant losses in equity value when a suit, decision, or settlement was announced. Moreover, the average loss to shareholders exceeded the amount the firm was required to spend to settle the case. Wright, Ferris, Hiller, and Kroll (1995) obtained similar results, and also found that firms receiving awards for exemplary affirmative action programs from the OFCCP had significant and positive excess returns (with respect to market valuation) on the ten days following the announcement, although this dissipated over time.

C. Summary

The research on organizational effectiveness has been limited to cross-sectional analyses comparing organizations that probably differed in their emphasis on affirmative action. Thus, there is a clear need for longitudinal research and for research on the effects of specific AAPs on organizational effectiveness. Nonetheless, it is interesting to discover that these studies provide no evidence for a negative effect of affirmative action on firm performance; there were no differences between organizations that appeared to emphasize affirmative action and those that did not. This conclusion contrasts with the prediction that increased minority hiring will be associated with decreased utility (e.g., Hunter, Schmidt, & Rauschenberger, 1977). There is a need to reconcile the theoretically-based prediction of decreased performance with the empirical finding of no difference. This discrepancy may be explained by Steffy and Ledvinka's (1989) computer simulation of the long-term effects of selecting employees according to different fairness rules (e.g., Cleary's regression approach versus proportional hiring by racial group). They found that utility was strongly affected by selection ratio and selection validity, but only weakly affected by the fairness rule (selection procedure). These results suggest that the use of affirmative action to increase minority representation may have little effect on organizational productivity in the long run, as demonstrated by the research summarized in this section. The nonsignificant effects are also inconsistent with the contention that increasing diversity will improve organizational performance (e.g., Fernandez, 1991), though of course there is more to diversity than race and gender. In the second area of research, it was found that stock prices drop when organizations are charged with violations of antidiscrimination laws, and rise when organizations are acknowledged for excellent affirmative action efforts.

Finally, it is important to stress that, although we have included all the relevant articles of which we are aware, this review of economic effects doubtlessly is not comprehensive. We provided this information because evaluations of affirmative action may be affected by assumptions of its economic effects.