Skip to main content

Research Reveals Racial Bias in Financial Analyst Valuations

Research by Kathy Rupar-Wang shows that financial analysts undervalue companies led by non-white CEOs, reacting 57 percent more strongly to bad earnings news. Despite this bias, these companies often exceed analysts' expectations the following year.
Kathy Rupar-Wang

Kathy Rupar-Wang, Associate Professor of Accounting

A recent study published in the Journal of Accounting and Economics has uncovered significant racial disparities in how financial analysts value companies led by non-white CEOs.

The research finds that bad earnings news impacts the valuation of companies with non-white CEOs 57 percent more severely compared to those with white CEOs, resulting in more pessimistic financial assessments. Moreover, companies led by non-white CEOs were more likely to exceed analysts' initial valuations the following year, suggesting these lower valuations lack economic merit.

The findings were documented in the paper "Do sell-side analysts react too pessimistically to bad news for minority-led firms? Evidence from target price valuations" by Scheller College of Business associate professor Kathy Rupar-Wang and colleagues Sean Wang and Hayoung Yoon, both with the Edwin L. Cox School of Business at Southern Methodist University. 

"To strengthen the link between CEO race and company valuation, we show the same effect with a controlled experiment where only the CEOs' photo varies across companies. This approach addresses the concern that non-white CEOs in our main analyses were somehow paired with uniquely poorly performing companies," said Rupar-Wang.

The study also revealed that racial bias becomes more pronounced during periods of heightened racial tensions. Interestingly, increased familiarity with non-white CEOs reduces these valuation disparities, indicating the bias may be subconscious. The researchers suggest that educational initiatives and increased awareness could help promote equality in financial markets.

The findings highlight the potential impact of implicit racial bias in professional settings, particularly in financial analysis and corporate evaluation.

This website uses cookies. For more information review our Cookie Policy

Source