Ethnic Investing and the Value of Firms

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 38% more—with minority-run firms benefitting the most—if the neutral proportion of active investors increased from 4.6% to 50%. This paper was accepted by Agostino Capponi, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.03660 .