Working Paper: CEPR ID: DP16316
Authors: Jonas Hjort; Changcheng Song; Christopher Yenkey
Abstract: We study ethnic investing, using transaction data from Kenya’s stock exchange and CEO/board turnover. We show that a given investor invests more in a given firm when the firm is run by coethnics and earns lower risk-adjusted returns on such investments. We then model and empirically test for the aggregate impact of (i) the implied taste- or psychology-driven investor discrimination and (ii) counteracting demand- and supply-side forces. Our estimates imply that listed Kenyan firms could collectively be worth 37 percent more—with minority-run firms benefitting the most—if the neutral proportion of active investors increased from 4.2 to 50 percent.
Keywords: Ethnic investing; Kenya; Stock market
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Psychological bias towards coethnic firms (J15) | Lower risk-adjusted returns (G11) |
| Investments made in firms with coethnic management (F23) | Risk-adjusted returns significantly lower (G17) |
| Proportion of neutral investors rises from 42% to 50% (G40) | Aggregate market value of firms increases by 37% (G34) |
| Changes in a firm's management ethnicity (M14) | Market value increases (G19) |
| Coethnic investing (J15) | Misallocation of demand across firms (D21) |
| Misallocation of demand across firms (D21) | Adverse economic consequences for minority-run firms (J15) |
| Investors significantly increase their investments in firms managed by coethnics (F23) | Investment in firms managed by coethnics (F23) |