Conventional wisdom holds that top managers should have diverse perspectives and ideas, i.e., cognitive diversity, to navigate unexpected events and foster organizational performance. However, the theoretical puzzle of how firm-specific unexpected events interact with cognitive diversity remains largely unsolved, as findings are equivocal, based on proxies rather than actual cognitive differences, and focused on unexpected events within the environment rather than firm-specific events. To resolve the puzzle, we build and test a fine-grained theory of how cognitive diversity affects both market reaction and financial performance when the top management has to respond to an unexpected event. Drawing on Expectancy Violation Theory and Uncertainty Regulation, we predict that high cognitive diversity generally harms market response amid unexpected events, and negatively impacts financial performance. However, we propose cognitive diversity has contingent benefits following negative or positive earnings surprises - after a negative surprise, the market's negative reaction to diversity diminishes, and after a positive surprise, diversity aids financial performance. We find broad support for our predictions, analyzing more than 22.3 million words spoken by top management teams of S&P 500 firms from 2008-2019 across 17,210 quarterly earnings calls.
