What it takes to be a CEO? A fun survey of literature

Research Notes

Mingze Gao, PhD

Macquarie University


May 22, 2020

Taking up the position of CEO means more than pressure from the board and investors. You’ll also face heavy scrutiny from academia. Whether or not a firm’s hiring and compensation committees use them as a reference, here are some of the findings that you may want to be aware of.

Upon birth

There are many things determined when you’re born. It’ll be naive to think that they matter less than anything else. A starter example is the Journal of Financial Economics paper “Are CEOs born leaders? Lessons from traits of a million individuals” by Adams, Keloharju and Knupfer (2018).

1. Birthday (month)

Birth month affects school entry, which affects whether you are relatively older in the class. If you are born after the cutoff month, you’ll have to wait for another year for entry. But this extra year buys you some more time to develop, which makes you more confident than the younger peers. This increased confidence is linked to adult labor market outcomes. Bai, Ma, Mullally and Solomon (2019 JFE) find that in mutual fund industry, it’s associated with better stock selection and fund performance. These relatively older fund managers also appear more confident in photographs and display more confident behaviours: making larger bets, window dressing their holdings less, and so on.

2. Birth order

The birth order also matters: negative associations between birth order and intelligence level have been found in numerous studies. More frankly, first born kids tend to have higher IQ scores. Kristensen and Bjerkedal (2007 Science) show that this is more dependent on social rank in the family where they receive more-favorable family interaction and stimulation. However, birth order is still the most prominent observable factor. Custodio and Siegel (2018) published a working paper where they find CEOs are more likely to be the first-born child of their family, and the results hold for both family and non-family firms, though thankfully the advantage of being first-born seems to decay over time.

3. Gender

Studies on CEO gender difference and its relation with firm risk-taking, capital allocation, accounting conservatism, corporate social responsibility, and so on are plenty. Genearlly it is shown that male executives are overconfident relative to female executives (Huang and Kisgen, 2013 JFE), and we know that overconfidence is not necessarily a good thing. Firms run by female CEOs use lower leverage and have less volative earnings, (Faccio, Marchica and Mura 2016 JCF), and there are a lot more differences in terms of firm operational, financial, and M&A performances. Tate and Yang (2015 JFE) show that female leaders cultivate more female-friendly cultures inside their firms. Moreover, (having) a female director may bring a firm more access to external finance. Goldman Sachs announced on 23 January 2020 that they won’t take companies public anymore unless they have at least one “diverse” board member.

4. Hometown

Everyone has some sort of hometown biases as well as hometown advantages. For example, Jiang, Qian and Yonker (2019 JFQA) find that CEOs are over twice as likely to acquire targets located in the states of their childhood homes than similar targets elsewhere. Smaller such deals are on average destorying shareholder value but bigger ones tend to be value enhancing. They conclude that CEOs may seek private benefits when acquiring small targets in their hometown but can also avoid poor deals due to hometown advantages. In a Chinese study, Kong, Pan, Tian and Zhang (2020 JCF) show that CEO’s hometown connections increase access to trade credit and such effect is more pronounced for non-SOEs and firms in poor regions. In another Chinese study on commercial banks, Bian, Ji and Zhang (2019 JBF) find that a higher degree of dialect similarity between chairman and the CEO is associated with a higher ROA, ROE and a lower cost-to-income ratio, but is not with bank risks, CEO pay or lower pay-performance sensitivity. They conclude that speaking a similar dialect with the chairman doesn’t undermine monitoring and reduces agency costs.

5. Cultural heritage

The place where you’re born has even more profound implications through cultural heritage. Nguyen, Hagendorff and Eshraghi (2018 RFS) show that following shocks to industry competition, firms led by CEOs who are second- or third-generation immigrants are associated with a 6.2% higher profitability compared with the average firm. Their analysis attributes this effect to various cultural values that prevail in a CEO’s ancestral country of origin. Through an epidemiological approach, Liu (2016 JFE) show that a corruption culture of corporate insiders’ country of ancestry is associated with higher likelihood of earnings management, accounting fraud, option backdating and opportunistic insider trading.

Early in life

Many early life experiences are closely linked to natural and family endowment, yet others may be random and exogenous. Either way, early life experience is something that will have an impact on CEO behaviours later on.

1. Education

No doubt education matters for everyone including CEO. Custodio and Metzger (2014 JFE) find that financial expert CEOs tend to be hired by more mature firms. Firms with financial expert CEOs hold less cash, more debt and engage in more share repurchases. They are able to raise external funds even when credit conditions are tight and their investments are less sensitive to cash flows. On the other hand, CEOs with an engineering (or scientific) education display higher investment-cash flow sensitivity (Malmendier and Tate (2005 JFE)). Similar findings appear in banking sector as shown by King, Srivastav and Williams (2016 JCF) focusing on CEO’s MBA quality. Moreover, education offers more than just knowledge and skills. Although Khanna, Kim and Lu (2015 JF) do not find evidence that connections and network ties developed during education are associated with corporate fraud, such CEO connectedness certainly affect information sharing, investments and so on. Wang and Yin (2018 JCF) find that CEOs tend to initiate more, larger and better M&A deals where target firms are headquarted in those states where they received their undergraduate and graduate degrees.

2. Disaster experience

People are shaped by their experiences and disasters are a major one. Several Chinese studies have shown that CEOs who have experienced famine are more risk-averse and hold more cash. They conduct less takeovers, but the M&A deals tend to perform better when they do according to Zhang (2017 PBFJ). Such risk aversion can sometimes be good as Hu, Li and Luo (2019 PBFJ) find that firms governed by CEOs experienced great famine have higher market value during crisis. But generally speaking this effect is mitigated by higher education background and is weaker in SOEs, as well as for CEOs who also experienced economic reform, which is shown to increase CEO’s risk tolerance by Hao, Wang, Chou and Ko (2018 IRF). American CEOs, for sure, are no exception. A famous Journal of Finance paper “what doesn’t kill you will only make you more risk-loving” by Bernile, Bhagwat and Rau (2016) concludes like its title. But more importantly, CEOs who experienced fatal disasters without extremely negative consequences lead firms more aggressively, whereas CEOs who witness the extreme downside of disasters behave more conservatively.

3. Academic, military and other experiences

Apart from previous industry experience, researchers also examined the role of many other executive experiences. Shen, Lan, Xiong, Lv and Jian (2019 Economic Modelling) find that top management team’s academic experience promotes corporate innovations and attribute the effect to improved internal control level and reduced information asymmetry. Benmelech and Frydman (2015 JFE) find that military service could make CEOs pursue lower coporate investment, and military CEOs are less likely to be involved in corporate fraudulent activity, performing better during industry downturns.

Personality traits

1. Masculinity

Masculinity is a long-studied factor in many fields of research and there’re also many interesting papers specifically on male CEOs. Since CEO testosterone levels cannot be tested directly, a common proxy in the literature is the facial width-to-height ratio (fWHR). Jia, Van Lent and Zeng (2014 JAR) find that a higher fWHR of a male CEO, representing more masculine faces, is associated with more misreporting, predicts his firm’s likelihood of being subject to SEC enforcement action and incidence of insider trading and option backdating. They also find that executive’s facial masculinity is associated the likelihood of being named as a perpetrator by SEC. In a forthcoming European Financial Management paper by Kamiya, Kim and Park (2018), male CEOs’ facial masculinity is found to be related to higher stock return volatility, higher financial leverage and more M&A activities. A paper at the 2018 Academy of Managment Annual Meeting by Joshi, Misangyi, Rizzi and Neely (2018), however, find that masculinity does not have a direct effect on the firm’s operational performance. The researchers also find that masculinity worked to the detriment of CEOs in female-dominated industries; less masculine CEOs also performed poorly in highly male-dominated environments.

2. Sensation-seeking, corruption and frugality

In “desperate” search for proxies and signals of CEO/manager quality and traits, studies have turned to some really interesting areas such as the cars they drive and whether they can fly airplanes. Brown, Lu, Ray and Teo (2018 JF) show that sensation-seeking hedge fund managers who own powerful sports cars take on more investment risks but do not deliver higher returns. “Red Ferrari syndrome”, as described by Business Insider, February 2016. Unfortunately, some investors themselves are susceptible to sensation seeking and hence fuel the demand for such managers. Mironov (2015 JFE) has an interesting study and finds that if you can get away from a traffic violation through bribe, as a manager, you may deliver some outperformance through, for instance, tax evasion, because corruption sometimes promotes efficiency.

Sunder, Sunder and Zhang (2017 JFE) look at pilot CEOs who fly airplanes as a hobby and find that they are significantly associated with better corporate innovation outcomes. They conclude that sensation seeking combines risk taking with a desire to pursue novel experiencecs and has been associated with creativity. Davidson, Dey and Smith (2015 JFE) even hired private investigators to collect data on executives’ legal infractions and ownership of real estate, boats, luxury vehicles and motocycles. They find no direct evidence of a relation between executives’ frugality and the propensity to perpetrate fraud. But there will be a relatively loose control environment characterized by relatively high and increasing probabilities of other insiders perpetrating fraud and unintentional material reporting errors during unfrugal CEOs’ reigns.

3. Creativity and innovation

One in five U.S. high-technology firms are led by CEOs with hands-on innovation experience as inventors. Islam and Zein (2020 JFE) show that firms led by “Inventor CEOs” are associated with higher quality innovation, especially when the CEO is a high-impact inventor. During an inventor CEO’s tenure, firms file a greater number of patents and more valuable patents in technology classes where the CEO’s hands-on experience lies. It is possible that such inventor CEOs are more capable of evaluating, selecting and executing innovative investment projects.

Family, marriage and fidelity

1. Newborns and loss of family members

“Corporate executives managing some of the largest public companies in the U.S. are shaped by their daughters”. Cronqvist and Yu (2017 JFE) find that when a firm’s CEO has a daughter, the corporate social responsibility rating (CSR) is about 9.1% higher, compared to a median firm. This finding perhaps reveals another plausibly exogenous determinant of CEO’s styles. On the other hand, a loss of important family member poses a significant negative shock. In the 2020 AFA Annual Meeting, I encountered a paper by Liu, Shu, Sulaeman and Yeung (2019) who find that after deaths in the family, bereaved managers take significantly less risk. Firms managed by bereaved CEOs exhibit lower capital expenditures, fewer acquisitions, lower debt issuance and lower CEO ownership after the bereavement events.

2. Marriage, divorce and (in)fidelity

While previous studies focused on the cultural background of the CEOs themselves, another paper I encountered in AFA Annual Meeting by Antoniou, Cuculiza, Kumar and Yang (2019) incorporates CEO spouses into the research. They show that the high uncertainty avoidance of CEO spouses will influence CEOs’ personal uncertainty avoidance, and then lead to less corporate risk-taking. Larcker, McCall and Tayan (2013) show that CEO’s divorce is impactful because it causes loss of control due to sale of stocks for divorce settlement, affects productivity, and attitude towards defaults.

One final interesting paper I want to mention to conclude this post is “the geography of financial misconduct” by Parsons, Sulaeman and Titman (2018 JF). In 2015, the website Ashley Madison, whose target clients are married people seeking an extramarital affair, was hacked and there was a leak of 40 million user account data of name, address and billing information. The researchers use the data to measure the intensity of spousal infidelity of a local area and find that financial misconducts are strongly related to unfaithfulness in the city.

Final note

This short survey of CEO literature is not meant to be comprehensive, but to list a few very interesting papers that I find fun to read. I guess the message is that being a CEO means a lot more than managing the firm and stakeholders, and shareholders also need to open their minds and eyes.

A funny example. Next time hiring a CEO, other things equal, maybe you’ll want a female immigrant who is the first-born kid and born in August, attended certain schools in certain areas, experienced natural disasters, served in military before, has a daughter and no sports cars, knows how to fly airplanes, loyal to her spouse from certain countries, and whose all family members are live and well…

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