Does The Market Value CEO Styles?

Antoinette Schoar
Massachusetts Institute of Technology (MIT) – Sloan School of Management; National Bureau of Economic Research (NBER)

Luo Zuo
Cornell University – Samuel Curtis Johnson Graduate School of Management

May 12, 2016

American Economic Review, Vol. 106, No. 5, 2016


We study how investors perceive the skill set that different types of CEOs bring into their companies. We compare CEOs who started their careers during a recession with other CEOs. We show that the announcement return around the appointment of a recession CEO is very significant and positive, and this positive market reaction is driven by cases where a recession CEO replaces a non-recession CEO. Our results indicate that the market assigns a positive and economically meaningful value to a recession CEO, suggesting that there is a limited supply of these types of CEOs in the executive labor market.

Does The Market Value CEO Styles? – Introduction

A growing body of research offers evidence that CEOs and other top executives show large and persistent person-specific heterogeneity in their management styles. Bertrand and Schoar (2003) document that such person-specific styles explain a substantial fraction of the variation in firms’ capital structures, investment decisions and organizational structures. The idea that CEOs greatly differ in their styles is also supported by a number of papers that show substantial changes in a firm’s stock price and accounting performance when its top management changes. For example, Perez-Gonzalez (2006) and Bennedsen, Nielsen, Perez-Gonzalez and Wolfenzon (2007) focus on transitions to family CEOs, and Parrino (1997) focuses on internal versus external successors. Similarly, a large literature suggests that CEOs’ specific traits play a role in their management approach. See, for example, Malmendier and Tate (2008) on CEO overconfidence; Kaplan, Klebanov and Sorensen (2012) on general ability and execution skills; Graham, Harvey and Puri (2013) on optimism and risk aversion; and Benmelech and Frydman (2015) on prior military experience.

But there is still considerable debate about the importance of managerial style. First, there is the question of where individual management styles come from: do they predominantly depend on the optimal, endogenous choice of managers, who want to invest in the skill set that promises the highest expected returns? Or are they shaped by formative events that are largely outside a manager’s control? The latter would imply that managers might not be at liberty to change styles, even when they might wish to. And if one’s management style depends on exposure to certain experiences or learning opportunities in a manager’s formative years, there might be constraints in the distribution of management styles (or skills) available in the managerial labor market.

The second question is whether managers “matter” to the firms they run. In other words, do managerial styles constitute a value added or even an idiosyncratic bias that the CEO “imposes” on the firm? Or are they just the expression of an endogenous choice made by the board to purposefully hire managers with certain types of skills based on the firm’s needs? 2 An extreme view of a frictionless CEO labor market might suggest that even if CEOs have heterogeneous styles, they do not have a causal impact on the firms they run, since boards will always hire the CEO with the right match of skills for the firm. Under this view, CEOs are interchangeable inputs into the production function, such as machines or other capital investments that firms undertake. So if the full spectrum of CEO styles is abundantly available in the market, there should be no systematic impact on the firm or its stock price when a new CEO hire is announced. However, if frictions exist in the CEO labor market or if certain skills are in short supply, then not all firms would be able to hire the type of CEO they would prefer.

In this paper, we build on Schoar and Zuo (2011), which shows how starting one’s career during a recession (as an exogenous formative event) affects the manager’s career progression and management style. Here we provide evidence on how the market values these recession styles: announcement period returns around the appointment of recession CEOs are very significant and positive; the cumulative abnormal return in the three days around the announcement is 1 percent. This positive announcement period return is driven by cases where a recession CEO replaces a non-recession CEO. This result suggests that the market assigns a positive and economically meaningful value to the selection of a recession CEO.

Where Do Managerial Styles Come From?

The empirical literature to date suggests that management styles depend on a mix of endogenously acquired characteristics and exogenous (formative) events that may lie outside the manager’s control. As an example of endogenously acquired skills, Bertrand and Schoar (2003) show that managers with an MBA degree follow more aggressive management strategies such as higher leverage or more market-driven investing. Custódio and Metzger (2014) find that firms headed by CEOs with a career background in finance hold less cash and more debt and make more share repurchases. In an efficient labor market, we would expect good managers to deliberately acquire these skills, knowing that they are valued by the market.

But there is also evidence that early career experiences outside a manager’s control can have a lasting impact on managers. Our own work, Schoar and Zuo (2011), examines the economic conditions when a manager enters the labor market. We find that CEOs who started their careers during a recession have a more conservative management style: recession CEOs invest less in capital expenditures and R&D, show lower overheads and have significantly lower leverage and working capital needs. Firms run by recession CEOs also have lower stock return volatility but a similar rate of return on assets, when compared to firms run by non-recession CEOs. A few other papers have also looked at the role certain formative experiences play in shaping a CEO’s management style. For example, Malmendier, Tate and Yan (2011) consider CEOs who grew up during the Great Depression, and Benmelech and Frydman (2015) analyze CEOs who underwent a military draft.

Taking formative experiences into account does not mean that managers are merely the passive recipients of a style that is imposed on them. In fact, they might make optimal decisions conditional on having been exposed to a certain formative event. For example, a manager who starts his career during a recession might invest in a complementary skill set that allows him to deepen his existing knowledge and strengthen the image that the market has of his type. Thus, a recession CEO might seek to learn more about cost cutting and lean management, which might go well with the “frugal” image of a recession CEO. Interestingly, we do not observe the reverse behavior in our analysis: we do not see managers working actively to undo the style predicted by their labor market entry cohort. If they did, observable managerial characteristics would not predict behavior. This is in line with a new theory paper by Dessein and Santos (2015): in complex and uncertain environments, the endogenous allocation of managerial attention amplifies even small initial manager fixed effects.

CEO Styles

CEO Styles

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