Monday, 30 March 2009

Academic proof of the costs of fame

Financial journalists have been drawing attention for years to anecdotal evidence suggesting that fame and publicity for business chiefs and the future fortunes of their companies do not go well together. Now has come the academic proof. Ulrike Malmendier of UC  — Berkeley and Geoffrey Tate of UCLA have recently published their study Superstar CEOs  after looking at the records of all those chief executives touted in major business publications as being the best and the brightest. The two academics and backed up the following conclusions with a range of statistical evidence:
We show that CEOs who win awards exhibit drastic changes in behavior and performance:
  • Firms with award winning CEOs suffer declining performance. This decline is observed in stock performance for the three years following the award, in return on assets over the same horizon, and in the ability to meet market earnings expectations. The decline is also observed both relative to the firm’s own performance prior to the award and to the performance of similar firms in which the CEO did not win an award.
  • Superstar CEOs extract higher compensation from the firm, largely in the form of stock and stock options. They obtain significant and economically meaningful increases in total compensation in the years following their award despite sub-par firm performance. Further, this increase in compensation seems to occur mostly in badly governed firms.
  • Superstar CEOs increase their indulgence in tasks which provide private benefits, but have little (if any) influence on firm value maximization. They are significantly more likely to author books and sit on outside boards in years after they have won an award, relative to years before they won an award.
  • Superstar CEOs are more likely to manage earnings, and ultimately to experience negative earnings after several years have elapsed following their last award. The incidence of earnings management increases both relative to years before the CEO won the award and relative to CEOs who never won an award.
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