The True Colors of Money: Racial Diversity and Asset Management

Abstract

We study the role of race and ethnicity in the investment decisions of mutual fund managers and investors. Funds managed by white-dominant teams allocate larger portfolio weights to firms led by white CEOs compared to funds managed by minority-dominant teams. Nevertheless, white-dominant fund management teams do not deliver superior performance on held firms led by white CEOs, suggesting no race-related informational advantage. Considering flow-performance sensitivity, funds managed by minority-dominant teams are equally penalized for poor performance but not rewarded as much for superior performance compared to white-dominant funds. Our results uncover differential treatment of minority-led funds and firms by investors.

Keywords: Racial/Ethnic Diversity, Mutual Funds, Social Identity Theory, In-group Bias, Flow-performance Sensitivity

JEL Classification: G02, G11, G23, J15, Z10