Bad News, Minority CEOs and Analyst Valuations

64 Pages Posted: 22 Dec 2021 Last revised: 1 Dec 2022

See all articles by Kathy Rupar

Kathy Rupar

Georgia Institute of Technology

Sean Wang

Southern Methodist University (SMU) - Accounting Department

Hayoung Yoon

Southern Methodist University (SMU) - Accounting Department

Date Written: November 30, 2022

Abstract

Examining over 97,000 analyst valuation targets following negative earnings news from 2005-2019, we find that the stock prices of Non-White CEO firms are more likely to surpass their estimated valuation targets in the subsequent 12 months than their White CEO counterparts. These differences are moderated by the degree of bad news, suggesting that analysts are overly pessimistic when estimating the impact of bad news on firm value when the CEO is Non-White. Accordingly, we investigate valuation differences between these two groups and find that Non-White valuations are indeed more pessimistic and the impact of bad news on analysts’ valuations is 4 times greater when the CEO is Non-White. In a randomized experiment, we manipulate the CEO’s race and elicit valuations from participants following negative earnings news and find similar evidence. To further improve causality, we confirm theories developed by prior research regarding implicit racial biases in psychology and economics that (1) analysts’ valuations more strongly attribute bad news towards Non-White CEO firms when race relations are worse and (2) shocks to racial awareness can attenuate these biases. Overall, our findings reveal racial valuation disparities from sell-side analysts and suggest that policies related to Diversity, Equity and Inclusion may be helpful in promoting equality within capital markets.

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

JEL Classification: G24, J71

Suggested Citation

Rupar, Kathy and Wang, Sean and Yoon, Hayoung, Bad News, Minority CEOs and Analyst Valuations (November 30, 2022). SMU Cox School of Business Research Paper No. 21-20, Available at SSRN: https://ssrn.com/abstract=3991111 or http://dx.doi.org/10.2139/ssrn.3991111

Kathy Rupar

Georgia Institute of Technology ( email )

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Sean Wang (Contact Author)

Southern Methodist University (SMU) - Accounting Department ( email )

United States
2147682858 (Phone)

Hayoung Yoon

Southern Methodist University (SMU) - Accounting Department ( email )

United States

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