We show that discrimination can occur even when it is common knowledge that underlying group characteristics do not differ and when employers do not prefer same-group candidates. When employers can judge job applicants' unknown qualities better when candidates belong to the same group and hire the best prospect from a large pool of applicants, the top applicant is likely to have the same background as the employer. The model has policy, empirical, and experimental implications. For example, the model predicts that "screening discrimination" is more likely to occur and persist in sectors in which underlying quality is important but difficult to observe, there are numerous applicants, interviewing (screening) is relatively cheap, and applicants have to acquire job-specific skills.

This paper presents an IPO signaling model in which some issuers signal their higher quality not only by underpricing their IPO more, but also by waiting more patiently before they sell the remainder of the firm in a seasoned equity offering (SEO). In contrast to earlier models, this model offers empirical predictions (including functional forms) on easily observable variables: the IPO underpricing, after-market returns (reflecting the issuer's actions), and the timing of the SEO. The paper can thus calibrate and better test the theory. The evidence is that [a] signaling high-quality issuers are worth 2–3 times more than non-signaling low-quality firms; [b] the market recognizes the true quality of a firm with probability 30% per year; and [c] patience (i.e. waiting for extra funding) costs issuers about 15% of their value each year.

We show that discrimination can occur even when it is common knowledge that underlying group characteristics do not differ and when employers do not prefer same-group candidates. When employers can judge job applicants' unknown qualities better when candidates belong to the same group and hire the best prospect from a large pool of applicants, the top applicant is likely to have the same background as the employer. The model has policy, empirical, and experimental implications. For example, the model predicts that "screening discrimination" is more likely to occur and persist in sectors in which underlying quality is important but difficult to observe, there are numerous applicants, interviewing (screening) is relatively cheap, and applicants have to acquire job-specific skills.