The Shadow Over Female Investment Analysts

You’re on pretty safe ground to claim that women are more risk averse than men. Innumerable studies over decades suggest as much. But you head into trouble by assuming the same tendency is at play in the professional finance world.  

It’s true that inexperienced female investors are usually quicker than their male counterparts to perceive the risk of a typical investment. And women tend to make smaller investments in riskier assets. But this risk sensitivity disappears when women actually work in finance. Research in the U.S. and Europe, for example, finds no gender differences in forecasting acumen among sell-side analysts (the people who work for brokerage firms and evaluate the investment potential of equity assets for clients). 

Female analysts perform as well—even better in some market conditions—as male analysts in forecasting stock earnings and prices. The question is, are the analysts’ male and female investor clients aware of this track record? Or do they unconsciously apply gender stereotypes to equity analysts and their buy/sell recommendations? 

This issue is important for investors as well as brokerage firms, says Yi Luo, a doctoral student at Smith School of Business and a Chartered Professional Accountant. 

“For investors, underreaction to a subset of analysts driven by unconscious bias means missing out on investment opportunities and lower returns,” says Luo. “And as long as analysts are evaluated—even partially—by how much the market reacts to their reports, underreaction to a group of analysts might aggravate the existing career barriers faced by female analysts.”

Same report, different byline

A study by Luo and Steven Salterio, Stephen J. R. Smith Chair of Accounting and Auditing, sheds light on the dynamics of gender and investment analysts. Rather than relying on market reaction to analyst recommendations, Luo and Salterio opted for an experiment in which they could isolate the effect of gender on investors’ decision-making. Their goal: to see how male and female investors react to an equity research report written by a male versus female equity analyst. Do investors assume that female analysts’ reports will be more sensitive to investment risk than male analysts’ reports and thus underreact to (that is, less likely to follow) their recommendations?

The researchers recruited 358 online participants who had invested in the stock market and had basic financial accounting knowledge. The participants first read background information on a fictional publicly-traded company and were asked to judge whether the company was worth investing in. They were then randomly assigned one analyst’s report containing either a “buy” or “sell” recommendation and asked again for their judgment of the firm as well as their perception of the analyst’s risk attitude and credibility. 

All reports contained identical descriptions of the analysts’ education, work experience and job title. The only difference was the report writer’s name: some were bylined Steven Smith and others Claire Smith.

Implicit bias emerges

Luo and Salterio found that gender does, indeed, affect how male and female investors perceive analyst recommendations. It’s not overt: Participants said they expected male and female analysts to be equally competent and trustworthy. But their behaviour said something else.

Female investors reacted more than male investors to Claire Smith’s buy or sell recommendations. When Claire Smith recommended “buy”, female investors indicated greater willingness to invest and greater confidence in the stock’s potential than male investors. And when the analyst’s report included a “buy” recommendation, female investors reacted more strongly to Claire Smith’s report than an identical report written by Steven Smith.  

In other words, women were more likely than men to change their initial view of an investment and follow the advice of a female analyst. 

But here’s the twist: When told that female analysts were as good as male analysts, the female investors in the study reversed their preference for female analysts’ reports and were less likely to follow their recommendations. “It was as if female investors were ‘afraid’ of showing preference for female analysts, when such a preference would possibly be warranted,” says Luo.

You may think there is an easy solution to make gender a non-issue: investment firms should publish analyst reports with only an initial for the author’s first name or with no byline at all. But it’s not so simple. For one, analysts build a following with investors based on their performance, which benefits them and their firms. For another, in the absence of knowing the gender of the analyst, investors invariably assume the analyst is a man. That’s what Luo and Salterio found; when only an initial was used for the first name, 72 per cent of participants in the study identified the analyst as male. “Even if we take away the gender of the analyst,” says Luo, “it’s still there.”

High stakes for investors

There’s a message here for male and female investors as well as for investment firms, Luo says. Male investors were shown in this study to somewhat underreact to female analysts’ recommendations. As a result, they may lose investment opportunities or retain losing stocks longer than they should. This does not make for a happy portfolio. Instead, men should consider whether they are hesitant to follow a woman’s investment advice because of the fundamentals or their false assumption that a female analyst has little appetite for risk. 

Female investors, meanwhile, should realize that “they are influenced by unconscious processing of gender information,” says Luo. “Women investors may have a preference for female advice,” says Luo, “but unconscious bias may cause them to second-guess their initial judgment.”

As for investment firms, the findings should nudge them to recruit and promote more female analysts. The investment and wealth management world has long been an Old Boys club for both advisors and clients. But there is now a need to attract more female clients. In the U.S., an unprecedented amount of assets will shift into the hands of women over the next five years. 

One way to attract female investors as clients is with female analysts and advisors. Previous research shows that if a female investor has an investment advisor of the same gender, she is more likely to have an aggressive portfolio with greater risks and returns. Yet only about 15 per cent of analysts are women. Clearly there is a recruitment challenge ahead.

Luo worked in public accounting before pursuing an academic career and saw first-hand the low number of women in prestigious client-facing positions.

“It’s a catch-22 situation for female participants in capital markets,” she says. “We need female investors who react to female analysts but we need female analysts to attract female investors. That’s the dilemma. Hopefully, now that investment firms want to recruit female investors, they can break the vicious cycle and start a virtuous cycle by hiring more female analysts who will attract female investors.”