This study explored racial diversity’s influence on firm performance. A national sample of 177 banks was used to first test competing hypotheses supported by the resource-based view of the firm and social identity theory that posited positive and negative direct effects, respectively, of racial diversity on organizational performance. No support was found for either prediction. However, a contingency theory-based hypothesis was supported. A moderation effect indicated that racial diversity’s association with performance was contingent on firms’ level of innovation. Specifically, racial diversity enhanced performance for banks pursuing an innovation strategy, whereas for banks low in innovation, performance declined. The results suggest that a racially diverse workforce in conjunction with an innovation-focused business strategy may provide firms a competitive advantage. This study thus supports a contingency/resource-based perspective that states that racial diversity, as a knowledge-based resource, needs to be set in an appropriate context to fully realize its potential benefits.

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