In groundbreaking research, Darius Miller and Ruidi Huang of SMU Cox, with coauthor Erik Mayer, examine gender bias in promotions within the U.S. financial industry. Miller says, “We uncover some of the first concrete empirical evidence that women must pass a higher bar to get promoted, something that was only recently made possible by advances in statistical techniques.” In other words, the research goes beyond simply documenting that women are promoted less than men, the often-cited gender gap — it shows hard evidence that gender bias can explain why the gender gap exists. Their large-scale sample covers approximately 72,000 workers from over 1,000 mortgage companies, also known as shadow banks.

Miller, Huang and Mayer base their work on Gary Becker’s Nobel Prize-winning model about discrimination (1957). In his Noble Prize acceptance lecture of 1992, Becker further advanced the economic thinking behind how to test for discrimination, now known famously as the “outcome test.”  Becker’s test makes two central predictions: that firms with bias will set higher promotion standards for marginally promoted female workers and incur costs by not promoting more qualified female workers.  

Important study setting

In the U.S. financial sector, despite women making up the majority of entry-level employees, women hold less than a quarter of top leadership roles, raising unanswered questions about gender bias. Miller and Huang note that the setting of shadow banks and the rank-and-file employees’ data is a natural laboratory.  Because it is not a required disclosure, there has essentially been no large sample data about non-C-suite employees, the middle- or lower-level employees. Their “unbiased” data is derived from regulation that promotes transparency at state or federal levels, matching loans to loan officers and managers. Huang describes the unbiased research context: “It’s the universe of mortgage officers, a whole population, not just a sample.” 

The authors cite the effect of how the pipeline and trajectory for women’s career moves occurs early on. Former Facebook chief executive Sheryl Sandburg argued that problems with women’s ability to achieve career success happens in the beginning of their career; it’s the “broken rung” at the lower part of the ladder rather than the well-studied “glass ceiling.”

Additionally, the study’s setting is economically important, with new mortgage originations totaling over $2 trillion annually. Also, mortgage loan officers’ compensation is primarily based on loan origination volume, which offers the measure of job performance. Importantly, the authors note that this large-scale data set, and an employee’s first transition from officer to manager, can reveal how women are promoted or not at the beginning of their careers. “We can see the detail of the trajectory of women’s performance under both female and male managers,” Miller says.

Promotions Gap

The study investigates whether the lack of women in leadership roles, the “gender promotion gap,” is a result of gender bias in promotions. First, the study revealed the existence of a gender promotion gap at mortgage companies they analyze: male loan officers are 15% more likely to be promoted than their female counterparts, even when controlling for performance and experience.

However, Becker would say that “gaps” are not informative about whether there is bias because there may be other factors at play. For example, women may prefer jobs with more family friendly hours, and so may turn down some promotions.  “It’s is a huge challenge to detect whether there is really bias versus other rational explanations,” Miller offers. He continues:

“Becker argued that because of this, the existence of a gender gap in promotions simply cannot prove the existence of gender bias. However, Becker proposed that measuring the relative outcome of the promotion decision is the better way to test for bias. The intuition follows: if we find promoted women make better managers than men—this is hard evidence that women had to be better than men to be promoted. That is, women were made to pass a higher promotion standard. In promotions, we analyze the performance of women managers at the juncture when they are promoted and it turns out they have performed better than the men.”

To accurately study this gap, you don’t look at the highest performers but at the last round of “the draft” to get an accurate comparison. Miller emphasizes, “It was considered near-impossible to identify who is at the margin for promotion – who Becker said you’d need to identify. We discovered a new advance in the economic literature that allowed for a statistical technique based on “instrument variables,” to identify who is at the margin.” Huang and Mayer developed an incredible database that allowed the new test, he says. Digging deeper into the source of the bias, they found evidence for “stereotyping bias,” since women were underpromoted [when working] under both male and female managers.

The analytical tools just emerged to be able to parse whether women are held to a different standard. “We are able to document that women are held to a higher standard,” Miller says. “You’ll dig deeper into the pile to promote a man rather than a woman,” Miller reflects. “You’ll [allow for] men with less managerial potential to be promoted, but a woman must be better to get that same promotion.”

Application of Becker

The authors find support for both of the predictions of Becker through the use of the nationwide panel of mortgage loan officers and their managers, roughly 72,000 workers from over 1,000 shadow banks from 2014 to 2019. “Firms with balanced hiring practices actually perform better,” Miller notes. “It’s a wake-up call to firms.”  This supports the second major prediction of Becker’s test for bias: firms with more equitable promotion practices are able to take advantage of the higher skilled women that other people are passing up — and they perform better.

The economy is essentially undermined over the long haul “by promoting less qualified people,” Miller adds. “We are one of the first research teams to use these new statistical techniques to go beyond documenting the gap.” Further, given the fact that bias can exist even under female managers, Miller surmises, then the recent trend of gender quotas for management positions may not be effective if women are still being held to a higher standard by women managers. Becker predicted that biased preferences or beliefs unrelated to productivity, such as promoting less qualified men because of their gender, will be costly to firms. The research finds correlations indicating that firms with larger gender gaps in promotion rates experience reduced lending volume, slower employment growth, and lower survival rates.

Overall, the study’s findings provide strong evidence of gender bias but suggest that having more women in managerial positions may not eliminate bias for the next generation of women in finance. The hard data in the study reveals what prior research was unable to prove — bias based on gender. Related to the economy-at-large, Miller suggests that firms with inequitable hiring practices will have poorer performance.

“Gender Bias in Promotions: Evidence from Financial Institutions” by Ruidi Huang and Darius Miller of the Cox School of Business, Southern Methodist University and Erik Mayer, University of Wisconsin-Madison, is forthcoming in Review of Financial Studies. The research also won the best paper award at the FMA/UC Davis Napa/Sonoma Finance Conference.

Written by Jennifer Warren.