When a discriminatory ideology takes over public opinion, highly qualified individuals from discriminated groups are often excluded from important positions in the economy. Can this type of economic exclusion due to discrimination cause serious economic losses? Recent events have brought this issue to the forefront once again. For instance, the US travel ban on citizens of seven Muslim-majority countries has raised fears among US business leaders that increasing discrimination will leave them unable to recruit and retain talent. Concerned firms include Amazon (Wingfield and Wakabayashi 2017), Ben & Jerry's (Solheim 2017), MasterCard (McGregor 2017), and Nike (Cox 2017). Another recent example comes from Turkey, where several thousand executives who follow the cleric Fethullah Gulen have been arrested or have fled overseas since 2016 (The Economist 2017b, New York Times 2017). Historic examples include the forced internment of Japanese-Americans during WWII and the expulsion of the entrepreneurial Huguenots from 17th century France.
The existing economics literature has largely focused on discrimination against women and blacks, mostly analysing the effects on individual wages and hiring probabilities (for extensive surveys, see Altonji and Blank 1999, Bertrand 2011, Bertrand and Duflo forthcoming). Hsieh et al. (2017) calibrate a Roy model to argue that declining discrimination against women and blacks in the US raised aggregate productivity. A small set of empirical papers analyses the effects of such discrimination on firms (Hellerstein et al. 2002, Szymanski 2000), inspired by Becker's (1957) influential prediction that discrimination reduces firm profitability.
In a recent study (Huber et al. 2018), we break new ground by studying the effects of a different type of discrimination, namely, the rise of an economy-wide discriminatory ideology that affects highly qualified individuals in leading positions. There is currently little evidence on the economic effects of this type of discrimination. Our study analyses discrimination against Jewish managers in Nazi Germany. We exploit the information content embedded in stock prices to quantify the economic costs of discrimination.
Removal of Jewish managers from firms in Nazi Germany
The treatment of Jews in Nazi Germany was arguably the most horrendous episode of discrimination and persecution in human history. Our study focuses on one particular aspect of anti-Semitic discrimination, the removal of senior Jewish managers from some of the largest German corporations.
We collect new data on almost 30,000 manager positions in all German firms that were listed on the Berlin Stock exchange from historical sources. The data indicate that before the Nazis grabbed power, Jews were overrepresented among senior managers. Jews held 15–16% of senior management positions in 1928 and 1932 (Figure 1), relative to a population share of 0.8%.
Figure 1 Percentage of Jewish managers over time
Notes: The figure reports the percentage of senior management positions that were held by Jewish managers in the 655 firms that were listed on the Berlin Stock Exchange. See Huber et al. (2018) for more details.
After the Nazis gained power on 30 January 1933, discrimination against Jews became commonplace in Germany. Many German firms voluntarily dismissed managers of Jewish origin or were coerced into removing them by Nazi officials. Deutsche Bank, for example, forced CEO Oscar Wassermann and executive board member Theodor Frank to resign their positions by 1 June 1933 (James 2001: 25–26). By the end of 1933, the fraction of Jewish managers had fallen by 27%. By 1938, virtually no Jewish managers remained in firms listed in Berlin.
We analyse firms that had employed Jewish managers in 1932 and lost them after the Nazi government took power. Many firms that the public did not perceive to be Jewish happened to employ managers of Jewish origin (such as Allianz, BMW, Daimler-Benz, and IG Farben). These firms lost a significant fraction of their senior managers after 1933. We compare these firms to other firms that had not employed any managers of Jewish origin and, therefore, remained unscathed by the removal of Jewish managers due to the Nazi ideology.
Effects of losing Jewish managers on the characteristics of firms’ senior management
In the first set of results, we show that losing the Jewish managers changed the observable characteristics of senior managers at firms that had employed Jewish managers in 1932. The number of managers with managerial experience, university degrees, and the total number of connections to other firms (measured by seats on other supervisory boards) fell significantly, relative to firms that had not employed any Jewish managers in 1932. The effects on all management characteristics persisted at least until the end of our sample period in 1938.
The effect of losing Jewish managers on stock prices
Next, we analyse the effect of losing Jewish managers on stock prices. We manually digitised more than 240,000 daily stock prices for the universe of German firms listed in Berlin for the years 1929 to 1943. This new dataset permits a comprehensive analysis of the evolution of German stock prices over a 15-year period.
We show that the stock prices of firms with Jewish managers fell sharply after the Nazis grabbed power in 1933, as the Jewish managers started to leave their firms (Figure 2). These losses persisted until the end of the stock price sample period in 1943, ten years after the Nazis had gained power. The stock price of the average firm that had employed Jewish managers in 1932 (where 22% of managers had been of Jewish origin) declined by about 12% after 1933, relative to a firm without Jewish managers in 1932.
Figure 2 The effect of losing Jewish managers on stock prices
Note: The figure shows the effect of losing Jewish managers for the average firm with Jewish managers, relative to firms without Jewish managers. The average firm with Jewish managers lost 22% of its managers after 1932. Coefficients and standard errors are scaled to reflect the effect on such a firm. See Huber et al. (2018) for more details and further results.
Interestingly, our estimated short-run effect of losing Jewish managers on stock prices is close to the initial stock price responses to prominent manager exits in recent times. For example, after Apple CEO Steve Jobs took permanent medical leave in 2011, the Apple stock fell by 6% (BBC 2011). When Fiat Chrysler CEO Sergio Marchionne stepped down due to surgery in 2018, the Fiat Chrysler stock lost 5% (Reuters 2018).
Our data also allow us to investigate the channels, through which the loss of the Jewish managers affected stock prices. Stock prices declined only for firms where the removal of the Jewish managers led to large losses in the number of university-educated managers and managerial connections (measured by seats on other supervisory boards). Stock prices did not significantly fall when the removal of the Jewish managers hardly affected these two measures. These results suggest that the stock prices of firms with Jewish managers in 1932 did not decline per se, but only if the firms lost managers with certain characteristics.
The effect of losing Jewish managers on dividends and returns on assets
In the third set of results, we analyse the effects of losing Jewish managers on two additional measures of firm performance: dividend payments and returns on assets. We find that after 1933, dividend payments fell by approximately 7.5% for the average firm with Jewish managers in 1932 (which lost 22% of its managers). This magnitude is similar to the fall in stock prices, which suggests that investors priced the stocks proportional to the dividend payments. We also find that after 1933, the average firm that had employed Jewish managers in 1932 experienced a decline in its return on assets by 4.1 percentage points. These results indicate that the loss of Jewish managers not only reduced investor returns, as measured by stock prices and dividend payments, but also led to real losses in firm efficiency and profitability.
Our findings inform our understanding of how the rise of a discriminatory ideology can cause real economic harm. A back-of-the-envelope calculation suggests that excluding the Jewish managers reduced the aggregate market valuation of firms listed in Berlin by 1.78% of German gross national product, a first-order economic loss.
We study arguably the most severe form of discrimination against a particular group of individuals, but even less severe forms of discrimination can lead to a loss of managerial talent. As highlighted above, the travel ban on citizens of seven Muslim-majority countries in the US or the persecution of Turkish businessmen who follow the cleric Fethullah Gulen are current examples of rising discrimination that are likely to affect firms. Even the perception of not being welcome in a country may lead to outflow of high-skilled individuals with similar consequences. A recent survey in the wake of the Brexit referendum suggests, for example, that 12% of Europeans who make between £100,001 ($130,000) and £200,000 a year were planning to the leave the UK in the coming years (The Economist 2017a). Our results indicate that such an exodus would have large economic consequences.
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