Wall Street Connections: Male Financial Analysts Benefit More Than Female, says INSEAD Study

While outright gender discrimination in education, hiring and promotions are on the decline, a more subtle and perhaps more insidious form bias has been noted among financial analysts on the Wall Street, says a new study by INSEAD Associate Professor of Finance, Lily Fang.

The paper titled “Gender and Connections among Wall Street Analysts,” by Prof. Fang and Sterling Huang, Assistant Professor at Singapore Management University School of Accountancy is being published in the coming Review of Financial Studies.

Prof. Fang, in the Study, says both women and men on Wall Street have good connections. However, the men are perceived to be better analysts because of their connections. “The men and women may be evaluated using different criteria in our subjective minds,” she says.

The Study examines how alumni ties with corporate boards differentially affect male and female analysts’ job performance and career outcomes. It found that connections improve analysts’ forecasting accuracy and recommendation impact, but the effect is two to three times as large for men as for women.

“While connections improve forecast accuracy for both male and female analysts, the effect is stronger for males. These ties lead to a 2% improvement in rankings of accuracy in general, but there is a further improvement for men of 4%.

Connections also contribute to analysts’ likelihood of being voted by institutional investors as “star” analysts but act as a partial substitute for performance in the case of men while a complement to performance for women, Prof. Fang says.

“Our evidence indicates that men reap higher benefits from connections than women in both job performance and the subjective evaluation by others.

“Male analysts on Wall Street benefit more from their networks than women. Men are perceived as more accurate and are forgiven more easily than women for making mistakes,” she adds.

Prof. Fang had measured connections by analysing alumni ties between the analysts and senior officers or board members. Women, like men, share a school tie with a senior officer or board member in about 25 % of the firms they cover. But there is a big difference in how these connections help male and female analysts in their jobs.

“While connections improve forecast accuracy for both male and female analysts, the effect is stronger for males. These ties lead to a 2% improvement in rankings of accuracy in general, but there is a further improvement for men of 4%.

“This is because the market reacts more favourably to their buy and sell calls. Connections improve male analysts’ recommendation impact by more than 1%, but not at all for female analysts,” Prof. Fang says.

Connections also play a different role in male and female analysts’ odds of being given the “All America Research Team” (AA) all-star title. It is awarded to those voted as top analysts by thousands of fund managers in an opinion poll organised by Institutional Investor magazine.

Investors are required to evaluate analysts on industry knowledge, communication, responsiveness, quality of written reports and forecast accuracy.

The Analysts’ career prospects can be massively impacted by the AA ranking, with winners of the titles earning around three times more than those without it.

The results of the study show that while connections contribute to both men’s and women’s odds of success, they cause different outcomes when the analysts make forecast errors. While such errors may reduce men’s chance of winning the AA title, the more connected he is, the lesser will be the negative effect of his errors. For female analysts, connections actually accentuate rather than attenuate the effect of forecast errors.

“We also show that the very different impact of connections on job performance was particularly pronounced among young analysts. This vastly different ability to capitalise on connections at such an early point in their career paths could explain gender gaps that exist throughout long-term career trajectories. The cycle, it seems, starts at the entry level,” Prof. Fang says.

To a certain extent, the difference in perceptions of male and female analysts could be attributed to the fact that there were very few female officers and directors at the firms covered.

While female analysts were not under-represented in the AA analyst pool, they had less female-female connections than the men had with other men. Female analysts with a connection to a female executive at the firm under coverage reduced forecast errors by 3.8% and enhanced their recommendation impact by 0.7%.

This compares to 2.1% when a female analyst is tied with a male executive. Male analysts benefit more from same-sex connections, with performance improvements nearly twice as large. Male-male connections were associated with a 7% reduction in forecast error and 1.1% increase in recommendation impact.

“Thus the value of the “old boys club” is hard to refute in our data. We believe our work reveals the bittersweet reality of the decades-long effort in pushing for gender equality,” Prof. Fang says.