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Discrimination, Managers, and Firm Performance: Evidence from 'Aryanizations' in Nazi Germany

Journal: Journal of Political Economy

Date: 20210901

Author: Huber, Kilian; Lindenthal, Volker; Waldinger, Fabian

Abstract:
Large-scale increases in discrimination can lead to dismissals of highly qualified managers. We investigate how expulsions of senior Jewish managers, due to rising discrimination in Nazi Germany, affected large corporations. Firms that lost Jewish managers experienced persistent reductions in stock prices, dividends, and returns on assets. Aggregate market value fell by roughly 1.8% of German GNP because of the expulsions. Managers who served as key connectors to other firms and managers who were highly educated were particularly important for firm performance. The findings imply that individual managers drive firm performance. Discrimination against qualified business leaders causes first-order economic losses.

Link: Google Scholar

Key Findings

Impact on Stock Prices

Firms that lost Jewish managers experienced a 10.3% decline in stock prices after 1933 compared to unaffected firms, persisting for at least 10 years

Loss of Manager Characteristics

Affected firms lost highly qualified managers with university education, experience, and valuable business connections that could not be adequately replaced

Economic Impact

The removal of Jewish managers reduced aggregate market valuation of listed firms by approximately 1.8% of German GNP

Stock Price Impact Over Time

  • Immediate decline of 10.3% in stock prices after Nazi rise to power in 1933
  • Persistent negative effect lasting through 1943
  • No significant differences between affected and unaffected firms before 1933

Manager Characteristics Impact

  • Jewish managers had higher levels of education, experience and connections
  • 45.2% of Jewish managers had university education vs 35.3% of non-Jewish managers
  • Jewish managers averaged 5.0 board connections vs 2.0 for non-Jewish managers

Financial Performance Decline

  • 7.5% decline in dividend payments for affected firms
  • 4.1 percentage point reduction in return on assets
  • Effects persisted through the end of the study period

Contribution and Implications

  • First causal evidence that discrimination against business leaders causes significant firm-level losses
  • Demonstrates that individual managers matter significantly for firm performance
  • Shows that discriminatory policies can have substantial negative economic consequences
  • Relevant for modern cases of discrimination and exclusion of qualified business leaders

Data Sources

  • Stock price effects based on Table 4 showing regression results of Jewish manager losses on stock prices
  • Manager characteristics comparison based on Table 1 summary statistics
  • Financial performance metrics based on Table 10 showing effects on dividends and returns on assets