Screening Discrimination in Financial Markets: Evidence from CEO-Fund Manager Dyads

Abstract

We find that demographic similarity to CEOs facilitates informed trading after accounting for networks and selective information distribution. Fund managers overweight firms whose CEOs resemble them in terms of age, ethnicity, and gender. Significantly higher trade performance and lower crash risk in the sub-portfolio of similar CEOs indicates that overweighting reflects informational advantage. Consistently, for similar CEOs, fund managers can better identify valuable CEO-firm matches, high-integrity CEOs, and firms with positive earnings announcement returns. The evidence supports theories of screening discrimination according to which in-group bias is a rational response to asymmetric information and has implications for fund manager diversity.

Keywords: CEO-investor demographic similarity, fund manager diversity, in-group bias, informational advantage, investment decisions, mutual fund performance, screening discrimination

JEL Classification: G11, G23, J10