CEO

Are CEOs born leaders? Lessons from traits of a million individuals

JF 2017; Renée Adams (Oxford), Matti Keloharju (Aalto), Samuli Knüpfer (BI Norwegian)

We use unique data from Sweden to examine the personal traits at age 18 of top business leaders, members of other high-skill professions, and the population in the years 2004−2010. The data come from the Swedish military, which examines the physical, cognitive, and noncognitive characteristics of all conscripts to assess whether they are physically and mentally fit to serve in the military and are suitable for training for leadership or specialist positions. Military service was mandatory in Sweden during our sample period, so the relevant test pool for our sample includes virtually all Swedish men. Our sample consists of data on 1.3 million men born between 1951−1978. Of these men, 26,000 served as CEOs of companies of varying sizes at some point in our sample.

We focus on three personal traits: cognitive and noncognitive ability and height. CEOs differ from other high-skill professions most in noncognitive ability. The median large-company CEO belongs to the top 5% of the population in the combination of the three traits.

Relative peer quality and firm performance

Bill B. Francis (Rensselaer), Iftekhar Hasan (Fordham), Suresh Babu Mani (Rensselaer), Pengfei Ye (VaTech)

This study examines the performance impact of the relative quality of a CEO’s compensation peers (peers selected to determine a CEO’s overall compensation) and bonus peers (peers selected to determine a CEO’s relative-performance-based bonus). We use the fraction of peers with greater managerial ability scores (Demerjian, Lev, and McVay, 2012) than the reporting firm to measure this CEO’s relative peer quality (RPQ). We find that firms with higher RPQ tend to earn superior risk-adjusted stock returns and experience higher profitability growth compared with firms that have lower RPQ.

CEO Talent, CEO Compensation, and Product Market Competition

JFE 2017, Hae Won Jung (Melbourne), Ajay Subramanian (Georgia State)

We develop a structural industry equilibrium model to show how competitive CEO-firm matching and product markets jointly determine firm value and CEO pay. We analytically derive testable implications for the effects of product market characteristics on firm size, CEO pay, and CEO impact on firm value.

  • CEO talent matters more in more competitive markets with greater product substitutabilities.

  • Our CEO impact estimates are much higher than those obtained by previous structural approaches that abstract away from CEO market segmentation. The estimates differ across industries primarily due to variation in product market competition, rather than variation in the CEO talent distribution.