By David F. Larcker and Brian Tayan, Stanford Research Spotlight Series, September 1, 2016 This Research Spotlight provides a summary of the academic literature on the influence that CEOs have on company outcomes (performance and risk). It reviews the evidence of: • The contribution of the CEO to overall company performance • The relation between previous managerial experience and future performance • The relation between personal attributes and performance • The relation between personality and performance • Factors that might influence risk tolerance This Research Spotlight expands upon issues introduced in the Quick Guide “CEO Succession Planning.”

1. David F. Larcker and Brian Tayan
Corporate Governance Research Initiative
Stanford Graduate School of Business
CEO ATTRIBUTES AND
FIRM PERFORMANCE
RESEARCH SPOTLIGHT

2. KEY CONCEPTS
The Influence of CEOs on Firms
• Corporate stakeholders want to hire CEOs with superior managerial and
leadership ability.
• However, the influence that CEOs have on firm outcomes (performance and
risk) is not clear.
– How important is the CEO to overall performance?
– Do skills and backgrounds predict future performance?
– Do personal attributes predict future performance?
• Researchers find modest evidence to explain how CEOs influence firms, but
the research is still evolving.

3. • Thomas (1988) measures the contribution that an individual CEO makes to
overall firm performance.
• Sample: 12 British retail companies, 1965-1984.
• Measures the unexplained variance in profits, sales, and profit margin after
controlling for economic, industry, and company-specific factors.
• Finds that CEOs are responsible for 3.9% to 7.0% of firm performance.
• Conclusion: CEOs do not have significant impact on overall performance.
IMPACT OF CEO ON PERFORMANCE
“Leader differences do account for performance variation within firms…
[but] these impacts are generally insufficient to outweigh the inbuilt
differences among firms that largely account for performance variation.”

4. • Mackey (2008) also measures the contribution of the CEO to overall
performance.
• Sample: 92 CEOs at 51 companies, 1992-2002.
– Includes only firms whose CEOs worked for more than one firm in the sample.
• Finds that CEOs account for 29.2% of unexplained variance in company
profitability (ROA) and 12.7% in business-segment profitability.
• Conclusion: CEOs have significant impact on overall performance.
IMPACT OF CEO ON PERFORMANCE
“The ‘CEO effect’ on corporate-parent performance
is substantially more important than that of industry
and firm effects.”

5. • Hambrick and Quigley (2014) apply more detailed control mechanisms to
measure the contribution of the CEO to performance.
• Sample: 830 CEOs at 315 companies, 1992-2011.
– Industry controls are varied over time to account for changing conditions.
– Firm-specific controls are adjusted to account for performance of the firm at
the start of each CEO’s tenure.
• Find that CEOs account for 35.5% of firm outcomes (measured as ROA).
• Conclusion: CEOs have significant impact on overall performance.
IMPACT OF CEO ON PERFORMANCE
“Our technique generates appreciably different insights about the influence and efficacy of
many individual CEOs, perhaps most notably those whose performance differs
dramatically from what they inherited and whose influence endures beyond their tenures.”

6. • Custódio, Ferreira, and Matos (2013) study the importance of general
versus firm-specific managerial experience among CEOs.
• Sample: 4,451 CEOs at S&P 1500 companies, 1993-2007.
• General managerial skill measured by number of previous positions, firms,
industries, prior CEO experience, and prior experience at a conglomerate.
• Find that CEOs with general managerial backgrounds receive 19 percent
higher pay than those with specialized backgrounds.
• (Do not test relation between experience and future performance).
• Conclusion: firms place a higher value on general managerial skill.
IMPORTANCE OF MANAGERIAL EXPERIENCE

7. • Falato, Li, and Milbourn (2015) study the associations between CEO
experience, compensation, and performance.
• Sample: 2,195 CEOs at S&P 1500 companies, 1993-2005.
• Find that:
1. Companies pay a premium for CEOs based on industry credentials, reputation
in the press, and educational background.
2. These pay premiums are justified based on subsequent performance (ROA).
• Conclusion: experienced CEOs are paid more and perform better.
IMPORTANCE OF MANAGERIAL EXPERIENCE

8. • Cai, Sevilir, and Yang (2015) also study the relation between CEO experience
and performance.
• Sample: 2,335 CEOs at S&P 1500 companies, 1992-2010.
– Identify 36 companies (“CEO factories”) that train the most future CEOs.
(e.g., General Electric, IBM, Procter & Gamble, and Pepsico)
– Compare performance of 471 “factory CEOs” and 1,864 “non-factory CEOs.”
• Find that:
1. Market reacts positively to appointment of CEOs from these companies.
2. Reaction is more positive the more years they spent at these companies.
3. These CEOs deliver superior 3-year future performance (ROA and Tobin’s Q).
• Conclusion: high-quality managerial training is associated with positive future
performance.
IMPORTANCE OF MANAGERIAL EXPERIENCE

9. • Kaplan, Klebanov, and Sorensen (2012) examine the relation between
personal and managerial attributes and firm performance.
• Sample: 316 CEO candidates at 224 private-equity owned firms, 2000-2006.
– Data from proprietary assessments that rate each candidate on 30 dimensions.
• Find that attributes relating to work style (e.g., speed, aggressiveness,
persistence, and work ethic) are more predictive of performance than
personal attributes (e.g., listening, teamwork, and integrity).
• Conclusion: managerial attributes might be predictive of future performance.
IMPORTANCE OF PERSONAL AND MANAGERIAL ATTRIBUTES
“There appears to be substantial variation in general managerial
talent that is measurable and different from the usual observable
characteristics such as age, industry, and SAT scores.”

10. • Gow, Kaplan, Larcker, and Zakolyukina (2016) examine the relation between
CEO personality and firm outcomes.
• Sample:
– Start with detailed personality assessments of 119 CEOs.
– Develop linguistic model to categorize CEOs by “Big Five” traits: agreeableness,
conscientiousness, extraversion, neuroticism, and openness to new experiences.
– Apply model to 4,591 CEOs using 70,329 conference call transcripts, 2001-2013.
• Find modest evidence that CEO personality influences strategic decisions
(e.g., R&D investment and leverage); and that extraversion is negatively
associated with future performance (ROA and cash flow).
• Conclusion: CEO personality might influence outcomes.
IMPORTANCE OF PERSONALITY

11. • Benmelech and Frydman (2015) study whether companies that have a CEO
with a military background perform better.
• Sample: 4,013 CEOs, 2,402 companies, 1980-2006.
• Find that CEOs with a military background:
– Are less likely to engage in fraudulent activity.
– Might perform better during times of industry stress.
– However, no overall impact on company performance or valuation.
• Conclusion: CEO background might be predictive of corporate outcomes.
BACKGROUND AND PERFORMANCE
“Military service emphasizes duty, dedication, and self-sacrifice. The military
may thus inculcate a value system that encourages CEOs to make ethical
decisions and to be more dedicated and loyal to the companies they run.”

12. • Bernile, Bhagwat, and Rau (forthcoming) study whether exposure to early-life
disasters influences a CEO’s subsequent risk tolerance.
• Sample: S&P 1500 companies, 1992-2012.
– Identify natural disasters that occurred when CEO was 5 to 15 years old.
– Measure severity of natural disasters by death rate.
• Find that CEOs who witnessed natural disasters with low (high) death rate
subsequently lead firms more aggressively (conservatively).
• Conclusion: CEO background might influence risk tolerance.
BACKGROUND AND RISK TOLERANCE
“Experiencing fatal disasters without extreme negative consequences desensitizes CEOs
to the negative consequences of risk. In contrast, CEOs who witnessed the extreme
downside potential of disasters appear to be more cautious in approaching risk.”

13. • Davidson, Dey, and Smith (2015) study whether corporate fraud is associated
with a CEO’s personal lifestyle.
• Sample: 109 companies that committed fraud, 1992-2004.
– Matched pairs with similar firms that did not commit fraud.
– CEO legal record: traffic violations, drug, alcohol, domestic violence, etc.
– CEO spending: real estate ownership, boats, luxury vehicles, motorcycles.
• Find that CEOs with legal records are more likely to commit fraud and CEOs
that spend lavishly on their personal lives lead firms with looser controls.
• Conclusion: CEO personal background might influence corporate risk.
BACKGROUND AND FRAUD
“Measures of executives’ ‘off-the-job’ behavior
capture meaningful differences in managerial style.”

14. • Wang, Holmes, Oh, and Zhu (2016) provide a comprehensive review of the
research literature on CEO attributes and firm performance.
• Sample: 308 studies, as of March 2015.
– Grouped by 5 measures: age, tenure, education, experience, and personality
• Find that:
1. CEO age, tenure, formal education, and prior career experience are positively
related to future performance.
2. Personality is related to strategic choices but not to performance.
• Conclusion: CEO attributes might affect corporate performance.
CEO ATTRIBUTES AND PERFORMANCE

15. • There is widespread interest in the role that a CEO has on corporate
outcomes and whether personal attributes influence their leadership choices.
• Estimates of the contribution that an individual CEO makes to overall
performance vary widely.
• Modest evidence exists that personal and professional attributes are
associated with their performance as managers:
– Previous experience and work style seem to be predictive of future performance.
– Personal choices and background are only modestly predictive.
– The importance of personality is unknown.
• Research on this topic is still being developed.
CONCLUSIONS

16. Alan B. Thomas. Does Leadership Make a Difference to Organizational Performance? 1988. Administrative Science Quarterly.
Alison Mackey. The Effect of CEOs on Firm Performance. 2008. Strategic Management Journal.
Donald C. Hambrick and Timothy J. Quigley. Toward More Accurate Contextualization of the CEO Effect on Firm Performance. 2014.
Strategic Management Journal.
Cláudio Custódio, Miguel A. Ferriera, and Pedro Matos. Generalists Versus Specialists: Lifetime Work Experience and Chief Executive
Officer Pay. 2013. Journal of Financial Economics.
Antonio Falato, Dan Li, and Todd Milbourn. Which Skills Matter in the Market for CEOs? Evidence from Pay for CEO Credentials. 2015.
Management Science.
Ye Cai, Merih Sevilir, and Jun Yang. Made in CEO Factories. 2015. Social Science Research Network.
Steven N. Kaplan, Mark M. Klebanov, and Morten Sorensen. Which CEO Characteristics and Abilities Matter? 2012. Journal of
Finance.
Ian D. Gow, Steven N. Kaplan, David F. Larcker, and Anastasia A. Zakolyukina. CEO Personality and Firm Policies. 2016. Social
Science Research Network.
Efraim Benmelech and Carola Frydman. Military CEOs. 2015. Journal of Financial Economics.
Gennaro Bernile, Vineet Bhagwat, and P. Raghavendra Rau. What Doesn’t Kill You Will Only Make You More Risk-Loving: Early-Life
Disasters and CEO Behavior. Forthcoming. Journal of Finance.
BIBLIOGRAPHY

17. Robert Davidson, Aiyesha Dey, and Abbie Smith. Executives’ ‘Off-The-Job’ Behavior, Corporate Culture, and Financial Reporting
Risk. 2015. Journal of Financial Economics.
Gang Wang, R. Michael Holmes Jr., In-Sue Oh, and Weeichun Zhu. Do CEOs Matter to Firm Strategic Actions and Firm Performance?
A Meta-Analytic Investigation Based on Upper Echelons Theory. 2016. Personnel Psychology.
BIBLIOGRAPHY