Study: financial analysts assume that black executives with prestigious degrees are not capable

Jim C. sends this, from Journal of Blacks in Higher Education:

A new study appearing in Organization Science, the journal of the Institute for Operations Research and Management Science, finds that financial analysts who rate management teams at large companies discount the educational backgrounds of black executives who graduated from prestigious colleges and universities. At the same time, white managers with prestigious educational backgrounds are singled out.

In an experiment, the authors of the article submitted company data to financial analysts which included the educational background of the executive team. Photographs of the executives were included in the information so that the analysts could surmise the race of the executives. The results showed that for companies with similar financial prospects, firms with white executives with prestigious educational backgrounds were projected to have high stock price gains. The lowest projected stock price gains were given to firms with black executives with prestigious educational backgrounds.

The authors concluded that the financial analysts assumed that the black executives were admitted to the prestigious educational institution under an affirmative action program and therefore they were not perceived as talented or as capable as white executives with similar educational backgrounds.

Here is the abstract of the article at Organizational Science (the article is pay only):

In this paper we report the results of two experimental studies designed to test how demographic characteristics affect outsiders’ assessments of a firm’s top managers. We draw on theories of evaluation and status characteristics to examine the interactive effects of managers’ racial characteristics and educational prestige on external perceptions. In the first study, we find that top executives’ educational background and race affected analysts’ valuation of a firm’s stock. Outside analysts made the highest stock price projections for firms led by white executives who had highly prestigious educational backgrounds but made the lowest valuations for firms led by African Americans with the same prestigious education. We posit that the moderating effect of executives’ racial characteristics stems from outsiders’ assumptions that African American managers received preferential treatment in the admissions process for high prestige universities. In the second study, we find that when we explicitly removed the possibility of preferential selection, analysts gave the same stock valuation to firms led by white and African American executives with high educational prestige. We discuss the implications of these findings for theory and management.

November 27

James P. writes:

“In an experiment, the authors of the article submitted company data to financial analysts which included the educational background of the executive team. Photographs of the executives were included in the information so that the analysts could surmise the race of the executives. The results showed that for companies with similar financial prospects, firms with white executives with prestigious educational backgrounds were projected to have high stock price gains. The lowest projected stock price gains were given to firms with black executives with prestigious educational backgrounds.”

The proper next step in the experiment is to determine whether it is actually true that the companies with black executives perform less well than companies with white executives—in which case the predictions of the financial analysts are valid.

Posted by Lawrence Auster at November 26, 2010 10:49 AM | Send