By Kilian Huber, Volker Lindenthal & Fabian Waldinger
Large-scale, government-directed discrimination against a group of people is extremely damaging to those being targeted. It also permeates every aspect of society, including business.
Despite the importance of the issue, we currently have little evidence on how costly discrimination against highly qualified individuals in leading positions can be. We analyzed discrimination against senior managers with Jewish origins in Nazi Germany. Using data on individual managers and corporations, we learned more about how the stock prices and the profitability of firms evolved when Jewish managers were removed from the German economy because of rising anti-Semitism.
We collected new data on almost 30,000 manager positions in German firms listed on the Berlin Stock Exchange, and found that managers of Jewish origin (either practicing Jews or Christians with a Jewish ancestor) held around 15 percent of senior management positions in 1928 and 1932. By 1938 virtually no Jewish managers remained in firms listed in Berlin.
We then compared firms with Jewish managers to other firms that had not employed any managers of Jewish origin and, therefore, remained unscathed. We controlled for a number of factors that may have affected firm stock prices, including connections to the Nazi party; the financial reporting period; and the firm size, age and industry.
We found that losing the Jewish managers changed the observable characteristics of senior managers at firms that had employed Jewish managers in 1932. Specifically, the number of managers with managerial experience, university degrees and connections to other firms (measured by seats on other supervisory boards) fell significantly. These effects persisted at least until the end of our sample period in 1938. Firms that had lost Jewish managers did not replace them with managers of similar characteristics. A likely explanation is that there were very few adequate replacements.
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. These losses persisted until the end of our stock price sample period in 1943. The stock price of the average firm that had employed Jewish managers in 1932 declined by about 12 percent after 1933, relative to a firm without Jewish managers in 1932.
While our study covers what’s arguably the most severe form of discrimination against a particular group of individuals, even less severe forms of discrimination can lead to a loss of talent.
Kilian Huber is a fellow in macroeconomics at the Becker Friedman Institute of the University of Chicago. Volker Lindenthal is a postdoctoral researcher at the Ludwig Maximilian University of Munich. Fabian Waldinger is a professor of economics at the Ludwig Maximilian University of Munich.