Bad News, Minority CEOs and Analyst Valuations
64 Pages Posted: 22 Dec 2021 Last revised: 1 Dec 2022
Date Written: November 30, 2022
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: Suggested Citation