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Large-scale, government-directed discrimination against a group of people is extremely damaging to those being targeted. It also permeates every aspect of society, including business. For example, talented people are often excluded from leadership positions if they belong to the group that faces discrimination. What are the costs of this, beyond stifling or ending the careers of thousands of people? Do corporations become less profitable when they adopt discriminatory attitudes and exclude highly qualified individuals from leadership roles? And how much do entire economies suffer when governments enact discriminatory policies against certain groups?

Answering these questions is crucial if we want to better understand two types of government policies: those that encourage members of discriminated-against groups to rise to leadership positions, and those that actively prevent them from doing so. The latter type of government policy in particular is reflected in current events and global history. Here are just a few examples: The travel ban on citizens of seven Muslim-majority countries, which has raised fears among U.S. corporations (including Amazon, Nike, and MasterCard) that increasing discrimination will leave them unable to recruit, retain, and develop talent. In Turkey, several thousand executives who follow the cleric Fethullah Gulen have been arrested or have fled overseas since 2016, fueling concerns of an economic collapse. The U.S. government gave in to “race prejudice” and forcibly interred Japanese-Americans during World War II. And in 17 th century France, the entrepreneurial Huguenots had to flee due to religious persecution.

Despite the importance of the issue, we currently have little evidence on how costly discrimination against highly qualified individuals in leading positions can be. Our recent study breaks new ground by measuring the economic losses caused by discrimination. Specifically, we analyze discrimination against senior managers with Jewish origins in Nazi Germany. Using data on individual managers and corporations, we learned more about how the stock prices and the profitability of firms evolved when Jewish managers were removed from the German economy due to rising antisemitism.

First, we needed to understand how the makeup of managers in Germany changed over the 1920s and ‘30s. We collected new data on almost 30,000 manager positions in German firms listed on the Berlin Stock Exchange. The data include managers with no Jewish ancestry, managers who worked at companies commonly perceived as Jewish, and managers at companies that weren’t perceived as Jewish, but happened to employ managers of Jewish origin (examples include Allianz, BMW, Daimler-Benz, and I.G. Farben).

We found that managers of Jewish origin (either practicing Jews or Christians with a Jewish ancestor) held around 15% of senior management positions in 1928 and 1932. When the Nazis came to power and Adolf Hitler became chancellor on January 30, 1933, however, discrimination against Jews became commonplace in Germany. Many firms voluntarily dismissed managers of Jewish origin or were coerced into removing them by Nazi officials. Deutsche Bank, for example, forced CEO Oscar Wassermann and executive board member Theodor Frank to resign their positions by June 1, 1933. By 1938, virtually no Jewish managers remained in firms listed in Berlin.

We then compared firms with Jewish managers to other firms that had not employed any managers of Jewish origin and, therefore, remained unscathed by the removal of these managers due to the Nazi ideology. We controlled for a number of factors that may have affected firm stock prices, including connections to the Nazi party; the financial reporting period; and the firm size, age, and industry.

We found that losing the Jewish managers changed the observable characteristics of senior managers at firms that had employed Jewish managers in 1932. Specifically, the number of managers with managerial experience, university degrees, and the total number of connections to other firms (measured by seats on other supervisory boards) fell significantly. These effects persisted at least until the end of our sample period on manager characteristics in 1938. These results show that the firms that had lost Jewish managers did not replace them with managers of similar characteristics. A likely explanation is that there were very few such highly qualified managers, so the firms were unable to find adequate replacements.

Next, we show that the stock prices of firms with Jewish managers fell sharply after the Nazis grabbed power in 1933, as the Jewish managers started to leave their firms. These losses persisted until the end of our stock price sample period in 1943, a full 10 years later. The stock price of the average firm that had employed Jewish managers in 1932 declined by about 12% after 1933, relative to a firm without Jewish managers in 1932.

Stock prices declined only for firms where the removal of the Jewish managers led to large losses in the number of university-educated managers and managerial connections, however. Stock prices did not significantly fall when the removal of the Jewish managers hardly affected these two measures. These results suggest that losing highly qualified managers, i.e. managers with a university education or with many connections, is responsible for the lower stock market performance of firms that lost Jewish managers. There is no evidence that these firms were hit by other shocks after 1933.

Interestingly, our estimated short-run effect of losing Jewish managers on stock prices is close to the initial stock price responses to prominent manager exits in recent times. For example, after Apple CEO Steve Jobs took permanent medical leave in 2011, Apple stock fell by 6%. When Fiat Chrysler CEO Sergio Marchionne stepped down due to surgery in 2018, the Fiat Chrysler stock lost 5%. This implies that the stock price response to losing highly qualified managers can still be as large today as it was in the 1930s.

In our third set of results, we analyzed the effects of losing Jewish managers on two additional measures of firm performance: dividend payments and returns on assets. We found that after 1933, dividend payments fell by approximately 7.5% for the average firm that lost Jewish managers, compared to a firm that did not lose any Jewish managers. We also found that after 1933, the average firm that had employed Jewish managers in 1932 experienced a decline in its return on assets by 4.1 percentage points. These results indicate that the loss of Jewish managers also led to real losses in firm efficiency and profitability.

This research helps inform our understanding of how the rise of a discriminatory ideology can cause real economic harm. A back-of-the-envelope calculation suggests that excluding the Jewish managers reduced the aggregate market valuation of firms listed in Berlin by 1.8% of German gross national product, a first-order economic loss.

While our study covers what’s arguably the most severe form of discrimination against a particular group of individuals, even less severe forms of discrimination can lead to a loss of talent. Even the perception of not being welcome in a country may lead to outflow of high-skilled individuals. A recent survey in the wake of the Brexit referendum suggests, for example, that 12% of Europeans who make between £100,001 ($130,000) and £200,000 a year were planning to leave the United Kingdom in the coming years. The results in our paper indicate that such an exodus could significantly hurt people, firms, and the economy.