Do sell-side analysts react too pessimistically to bad news for minority-led firms? Evidence from target price valuations

We find that 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...

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Bibliographic Details
Published in:Journal of accounting & economics 2024-06, p.101707, Article 101707
Main Authors: Rupar, Kathy, Wang, Sean, Yoon, Hayoung
Format: Article
Language:English
Subjects:
CEO
Earnings announcement
Financial analyst
Racial discrimination
Target price
Valuation
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Summary:We find that 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 CEO familiarity attenuate these disparities, suggesting the bias we document appears to be subconscious. Our findings suggest that resources allocated towards educating a firm’s stakeholders about the potential impact of implicit racial biases and increasing self-awareness may be impactful in promoting equality within capital markets.
ISSN:0165-4101
1879-1980
DOI:10.1016/j.jacceco.2024.101707