Too Good to Be True? The Unintended Signaling Effects of Educational Prestige on External Expectations of Team Performance

In this paper we report the results of three experimental studies designed to test how demographic characteristics affect outsiders' assessments of a firm's top managers. We draw on theories of evaluation, status characteristics, and social identity to examine the interactive effects of managers' racial characteristics and educational prestige on external perceptions. In the first study, we find that top executives' educational background and race affected analysts' valuation of a firm's stock. Outside analysts made the highest stock price projections for firms led by Caucasian executives who had highly prestigious educational backgrounds but made the lowest valuations for firms led by African Americans with the same prestigious education. We posit that the moderating effect of executives' racial characteristics stems from outsiders' assumptions that African American managers received preferential treatment in the admissions process for high-prestige universities. In the second study we find that outsiders did in fact make assumptions of race-based preferential treatment when they encountered African American managers from prestigious schools. In the third study, we find that when we explicitly removed the preferential selection bias, analysts gave the same stock valuation to firms led by Caucasian and African American executives with high educational prestige.