Despite the increasing prevalence of ethnic diversity, findings regarding its effects on team performance remain contradictory. We suggest that past inconsistencies can be reconciled by examining the joint impact of leader behavior and leader categorization tendencies in ethnically diverse teams. We propose that leaders who exhibit high levels of visionary leader behavior and also have the tendency to categorize their team members into in- and out-groups will facilitate a negative effect of ethnic diversity on team communication and financial performance, whereas leaders who exhibit visionary behaviors but do not tend to categorize will lead ethnically diverse teams to positive outcomes. We find support for these ideas in a study of 100 retail outlets. © 2011 American Psychological Association.