For this post, I interviewed Letian Zhang. Professor Zhang is an Assistant Professor of Business Administration in the Organizational Behavior Unit at Harvard Business School. He is an Economic Sociologist. His research focuses on inequalities in the labor market, with particular attention to those that affect minorities and women.
I asked him about his paper, “Shaking Things Up: Unintended Consequences of Firm Acquisitions on Inequality and Diversity.” In this paper, Professor Zhang is interested in how mergers and acquisitions (M&A) affect women and minorities in their workplaces. He interviewed executives who experienced M&A’s first-hand. He also collected data, similar to the US census, but for companies that employ at least 100 people, from 1971-2015.
When a company is acquired, lay-offs are inevitable. Previous work, like this paper, for example, has shown that, in general, the college-educated, highly skilled workers are at less risk of losing their jobs. It is the lower skilled, or back-office workers who are most often laid off. Professor Zhang measures diversity in the workplace with the proportion of minority managers or of female managers. He found that, compared to firms that did not experience an M&A, 5 years after an M&A, the proportion of minority managers increased by anywhere from about 2 to 5 percent, depending on the minority, and the proportion of female managers increased by about 2 percent. And, interestingly, the effect was stronger when the acquiring firm was more diverse.
So, this is a nice example of a positive unintended consequence. And Professor Zhang has a very intuitive interpretation of it. While firms engage in M&A’s for financially motivated reasons, Professor Zhang did find in his interviews that executives do value, and want to increase, diversity. However, doing so in the absence of a large restructuring like an M&A is far too costly. So, they wait until an M&A, and take advantage of the opportunity to diversify. So, in this sense the diversity that results from M&A’s may not be fully unintended, but more like an unexpected benefit of M&A’s.
Professor Zhang was careful in his analysis, checking for other possible explanations for his result. For example, maybe the white men in managerial positions were voluntarily leaving after M&A’s. If so, this should happen more during good economic times. But this was not the case in his data. Or, maybe companies are looking to cut costs by eliminating the higher paid white men. If so, this should be happening in the companies in the most dire financial situations. This was also not the case in his data.
Professor Zhang’s results show that M&A’s provide an opportunity for improved racial and gender equality. But, keep in mind that they do generally result in layoffs of workers in lower level positions, potentially increasing socioeconomic inequality. No doubt it’s a complex issue -- we can learn from the different ways that different economists, and sociologists, approach and evaluate it.
I asked Professor Zhang about his related current work. He has work in progress in which he is interested in the effect that the political affiliation of the CEO has on the level of racial inequality within a firm, and how this effect varies. So far he is finding that more liberal CEO’s tend to value diversity more, and that CEO’s have more influence on the level of racial inequality when the business is changing more strategically.
Let’s talk! I would love to know what you think about this example of unintended consequences. Please submit comments and questions.