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  5. Special Topics: Finance and Race
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Special Topics: Finance and Race

Paper Session

Saturday, Jan. 7, 2023 2:30 PM - 4:30 PM (CST)

Sheraton New Orleans, Rhythms I
Hosted By: American Finance Association
  • Chair: Rohan Williamson, Georgetown University

Who Benefits from Retirement Saving Incentives in the U.S.? Evidence on Racial Gaps in Retirement Wealth Accumulation

Taha Choukhmane
,
Massachusetts Institute of Technology
Jorge Colmenares
,
Massachusetts Institute of Technology
Cormac O'Dea
,
Yale University
Jonathan Rothbaum
,
U.S. Census Bureau
Lawrence Schmidt
,
Massachusetts Institute of Technology

Abstract

In 2020, U.S. private employers and the federal government devoted a combined \$360bn to encourage contributions to retirement savings plans. In this paper, we study the distributional impact of these tax and employer match incentives across racial groups using a new linked employer-employee dataset covering millions of Americans. On average, White workers contribute 4.6\% of their salary to employer-sponsored retirement accounts whereas Black (Hispanic) workers contribute 2.9\% (3.3\%) of their salary to such accounts. Differences in income across racial groups only explain one-third of this racial gap in retirement saving and large disparities remain even after controlling for income, education, occupation, county of residence and employer fixed effects. Employer matching contributions and tax incentives amplify the differences in retirement saving between Whites and Blacks by 45\% and between Whites and Hispanics by 37\%. Cumulatively, our findings imply that that the average Black (Hispanic) American will retire with around \$350,000 (\$280,000) less wealth at age 60 than the average White American. Finally, we explore the mechanisms driving these disparities. Proxies for financial literacy (such as education) explain only a small fraction of the racial gap in retirement saving. Instead, we find evidence that Black and Hispanic households face tighter liquidity constraints. Black retirement savers are 9.6 percentage points more likely than Whites to take a (tax-penalized) early withdrawal from their retirement account in any given year, a sign of limited access to alternative means of liquidity. This finding suggests that liquidity constraints may lead Black and Hispanic households to forgo generous tax and employer matching incentives, exacerbating racial wealth inequality.

Back to the Roots: Ancestral Origin and Mutual Fund Manager Portfolio Choice

Manuel Ammann
,
University of St. Gallen
Alexander Cochardt
,
Harvard University and University of St. Gallen
Simon Straumann
,
WHU-Otto Beisheim School of Management
Florian Weigert
,
University of Neuchatel

Abstract

We exploit variation in the ancestries of U.S. equity mutual fund managers to show that ancestry affects portfolio decisions. Controlling for fund firm location, we find that funds overweight stocks from their managers' ancestral home countries in their non-U.S. portfolio by 132 bps or 20.34% compared with their peers. Similarly, funds overweight industries that are comparatively large in their manager's ancestral home countries. Stocks linked to managers' ancestry do not outperform stocks in the same countries and industries but held by managers of other ancestries. This supports the notion that ancestry-linked investments are not informed but due to familiarity.

The Impact of Minority Representation at Mortgage Lenders

Scott Frame
,
Federal Reserve Bank of Dallas
Ruidi Huang
,
Southern Methodist University
Erik Mayer
,
Southern Methodist University
Adi Sunderam
,
Harvard University

Abstract

We study links between the labor market for loan officers and access to mortgage credit. Using novel data matching the (near) universe of mortgage applications to loan officers, we find that minorities are significantly underrepresented among loan officers. Minority borrowers are less likely to complete mortgage applications, have completed applications approved, and to ultimately take-up a loan. These disparities are significantly reduced when minority borrowers work with minority loan officers. Minority borrowers working with minority loan officers also have lower default rates. Our results suggest that minority underrepresentation among loan officers has adverse effects on minority borrowers’ access to credit.

The True Colors of Money: Racial Diversity and Asset Management

Lina Han
,
Washington University-St. Louis
Xing Huang
,
Washington University-St. Louis
Ohad Kadan
,
Washington University-St. Louis
Jimmy Wu
,
Washington University-St. Louis

Abstract

We study the role of race and ethnicity in the investment decisions of mutual fund managers and investors. Funds managed by white-dominant teams allocate larger portfolio weights to firms led by white CEOs compared to funds managed by minority-dominant teams. Never- theless, white-dominant fund management teams do not deliver superior performance on held firms led by white CEOs, suggesting no race-related informational advantage. Considering flow-performance sensitivity, funds managed by minority-dominant teams are equally penal- ized for poor performance but not rewarded as much for superior performance compared to white-dominant funds. Our results uncover differential treatment of minority-led funds and firms by investors.

Discussant(s)
Luigi Guiso
,
Einaudi Institute for Economics and Finance
Noah Stoffman
,
Indiana University
Francesco D'Acunto
,
Georgetown University
Alok Kumar
,
University of Miami
JEL Classifications
  • G0 - General