Do Sell-side Analysts React Too Pessimistically to Bad News for Minority-led Firms? Evidence from Target Price Valuations

The adverse impact of bad news on analysts’ valuations is 57% larger when the CEO is Non-White, resulting in more pessimistic valuations for Non-White CEOs relative to their White counterparts. Non-White CEO firms are more likely to surpass analysts’ valuation targets in the subsequent 12 months, suggesting that this racial gap lacks economic justification. To provide further evidence of a racial bias: (1) we triangulate our empirical findings with corroborating evidence from a controlled experiment and (2) we provide evidence that analysts’ valuation disparities towards Non-White CEO firms become larger when race relations are worse. Increases in racial awareness and CEO familiarity attenuate these disparities, suggesting the bias we document appears to be subconscious. Overall, our findings suggest that resources allocated towards Diversity, Equity and Inclusion (DEI) regarding racial stereotypes may be impactful in promoting equality within capital markets.

Keywords: Racial discrimination, financial analyst, valuation, CEO, earnings announcement, target price

JEL Classification: G24, J71

Suggested Citation: Suggested Citation

Rupar, Kathy and Wang, Sean and Yoon, Hayoung, Do Sell-side Analysts React Too Pessimistically to Bad News for Minority-led Firms? Evidence from Target Price Valuations (January 6, 2024). SMU Cox School of Business Research Paper No. 21-20, Journal of Accounting and Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3991111 or http://dx.doi.org/10.2139/ssrn.3991111