Taking Advantage of Employer Tax Incentives for Workplace Diversity

Increasing workplace diversity is a key component of the social pillar of environmental, social, and governance (ESG) activities. In this study, we use financial statement disclosures to identify firms that claim the Work Opportunity Tax Credit (WOTC), a federal tax program that incentivizes businesses to hire underrepresented workers, thereby increasing workplace diversity. Consistent with companies claiming the WOTC when the economic benefits outweigh the costs, we find participation is more likely for companies that rely on lower-wage labor, are profitable, and are headquartered in states with WOTC-type tax incentives. Next, motivated by increased demand for corporate-level ESG activities, we examine the outcomes of WOTC disclosure. Relative to a matched control sample, firms disclosing WOTC participation receive higher ESG ratings on social issues and are more likely to be owned by socially responsible investment funds. Consistent with increased investor demand for firms engaged in ESG activities, we find WOTC disclosure is positively associated with stock liquidity. However, we find no association with firm value. Our findings provide relevant insights to legislators as they modify the WOTC and to companies evaluating the potential ESG benefits of WOTC participation and disclosure.