The Emergence of Racial Sympathy: Evidence from the Stock Market Reaction to anti-Asian Sentiment during COVID-19

Abstract

Racial resentment towards Asian Americans has surged upwards in the Covid-19 pandemic. While the number of hate incidents have shot up, there is also a growing movement to reverse this trend, particularly from the business community. In this study, we examine whether racial biases – be it antagonism or sympathy – towards Asian Americans shows up in the trading behavior of investors. We compare the stock market response of Asian-American-CEO led firms with that of White-CEO led firms. We find that on days of high racial resentment, when investors are expected to be negative towards Asian Americans, the stock market reaction is positive and significant for Asian-American-CEO firms as compared to White-CEO firms. In two placebo tests, we find that the positive abnormal returns noted for Asian-CEO led firms do not occur outside of our event dates, and that the market reaction does not extend to other minority led firms. Investigating the reasons for this positive reaction, we find that it cannot be explained by differential mispricing or media coverage of Asian-American-CEO firms. We find that the positive reaction is predominantly generated from firms headquartered in states low in racial resentment, which suggests that the observed phenomenon is racial sympathy exhibited by investors. Strengthening this argument, we find that market reaction for sympathy triggering events is greater than low sympathy events. Our findings point to the emergence of racial sympathy in the financial markets.