The CEO’s origin and fame in relation to company performance and market perception

Marcolino, Lucas Tresso Caruso; Silva, Vinicius Augusto Brunassi

doi:10.1590/1808-057x20221523.en

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Original Article • Rev. contab. finanç. 33 (90) • 2022 • https://doi.org/10.1590/1808-057x20221523.en copy

The CEO’s origin and fame in relation to company performance and market perception^* * Study presented at the XLV ANPAD Conference, October of 2021.

Authorship SCIMAGO INSTITUTIONS RANKINGS

Abstract

This article investigated decisions to change chief executive officer (CEO) and the relationships between the characteristics of the new CEO chosen and both company performance and stock market perceptions. Our study aims to broaden the understanding in an area that remains underexplored by the literature. In particular, we present a new direction for the study of Malmendier and Tate (2009) by addressing the question of superstar CEOs considering the market’s perception regarding the hiring of an executive and their performance in the new company. The article highlights a new research question that permeates the market’s perception with regard to changing executives classified as superstars. In addition, the study connects the literature on superstar CEOs and changing executives, presenting new findings for the theme. The results obtained provide new findings for the literature and elucidate that superstar CEOs are positively evaluated by the market at the time of the hiring announcement. However, these executives do not show better performance than the other companies in the sector in subsequent periods, which corroborates and extends the negative aspects found by Malmendier and Tate (2009). The methodology used was an event study, OLS, Logit, and Probit. This article highlights that bigger companies with better operational performance have a greater probability of choosing a new CEO with superstar status in situations of changing executives. CEOs of external origin and classified as superstars are, on average, better evaluated than their peers by the market in the event window relating to the hiring announcement. However, the performance of these executives may fall short of the results calculated for the sector average. The aforementioned results broaden the discussion regarding decisions to change executives and highlight new findings about the role of the CEO’s origin and their status of recognition and fame.

Keywords:
CEO changes; event study; company performance; superstar

Group	Variable	Symbol	Definition
Variables of interest of the new CEO	Origin	Orig	Dummy for the new CEO’s origin. If an external CEO is chosen it will be equal to 1.
Variables of interest of the new CEO	Superstar	Star	Dummy: if the CEO is a superstar they receive a value equal to 1.
Characteristics of the new CEO	Education	Edu	The CEO’s years of study on a higher education course, considering graduate level, post-graduate level, MBA, Master’s, or Ph.D..
	Area of training	Train	Dummy: for Engineering areas it equals 1 and other areas of training it equals 0. Garcia-Blandon et al. (2019Garcia-Blandon, J., Argilés-Bosch, J. M., & Ravenda, D. (2019). Exploring the relationship between CEO characteristics and performance. Journal of Business Economics and Management, 20(6), 1064-1082. https://doi.org/10.3846/jbem.2019.10447 https://doi.org/10.3846/jbem.2019.10447... ) and Murphy et al. (1991Murphy, K. M., Shleifer, A., & Vishny, R. W. (1991). The allocation of talent: Implications for growth. The Quarterly Journal of Economics, 106(2), 503-530. https://doi.org/10.2307/2937945 https://doi.org/10.2307/2937945... ) presented indications that training in engineering is associated with better performance.
	MBA, post-graduate, Master’s, and/or Ph.D.	Post	Dummy variable with the value of 1 for CEOs who concluded an MBA, post-graduate, Master’s, and/or Ph.D. course and 0 for CEOs only trained to graduate level or without full higher education.
	Gender	Gender	Dummy variable with the value of 1 for men and 0 for women.
	Years of experience	Exp	Years the new CEO has worked in management roles as clearly disclosed in the Material Fact of the Change of CEO or in the Reference Form of the CVM at the time the new CEO is registered.
Company variables	Rate of Return	ROA	Last information disclosed by the company before the date of the event. Calculation based on net income divided by total assets.
	Leverage	Lev	Last information disclosed by the company before the date of the event. Calculation based on total debt divided by net equity.
	Earnings per Share	E/S	Last information disclosed by the company before the date of the event. Company earnings in the period divided by the quantity of shares in circulation.
	Market-to-Book Ratio	M/B	Last information disclosed by the company before the date of the event. Market value of the company (share price multiplied by the quantity of shares in circulation) divided by the company’s book value.
	Size	LnSiz	Last information disclosed by the company before the date of the event. Value of total assets expressed in natural logarithm.
	Governance	Gov	Dummy variable: the value is equal to 1 for companies classified as new market and level 2.

Companies (n)	Treatment	Descriptive statistic	Company indicators
Companies (n)	Treatment	Descriptive statistic	ROA	Lev	E/S	M/B	Siz	Gov
132	Without winsorization	Minimum	-613.7	-14.2	-4819.6	-126.6	0.0	0.00
		Mean	-8.7	104.5	-91.5	0.4	47.9	0.76
		Maximum	73.1	450.5	1385.5	24.8	866.8	1.00
		Standard deviation	61.2	120.7	556.8	16.2	149.0	0.43
	Winsorization at 5%	Minimum	-34.3	0.0	-322.8	-0.5	0.2	0.00
		Mean	-1.7	103.9	-23.6	2.0	22.0	0.76
		Maximum	17.9	425.5	5.2	8.4	118.9	1.00
		Standard deviation	13.0	116.4	78.3	2.3	35.0	0.43

Characteristics of the CEO		Total		Origin				Fame/Recognition
		Total		Internal		External		Normal		Superstar
		CEO (n)	%	CEO (n)	%	CEO (n)	%	CEO (n)	%	CEO (n)	%
TOTAL		132	100	92	70	40	30	97	73	35	27
Gender	Man	127	96	89	67	38	93	70	34	26	18
Gender	Woman	5	4	3	2	2	4	3	1	1	0
Education	No higher education	4	3	4	3	0	4	3	0	0	0
	Full higher education	48	36	37	28	11	34	26	14	11	7
	MBA/post-graduate	63	48	38	29	25	49	37	14	11	8
	Master’s/Ph.D.	17	13	13	10	4	10	8	7	5	4
Area of training (graduation)	Engineering	52	39	34	26	18	34	26	18	14	11
	Business	58	44	42	32	16	46	35	12	9	7
	Others	17	13	12	9	5	12	9	5	4	1
	None	5	4	4	3	1	5	4	0	0	0
Years of study	≤ 3 year	3	2	3	2	0	3	2	0	0	0
	4 to 5 years	47	36	36	27	11	34	26	13	10	7
	6 to 7 years	45	34	30	23	15	33	25	12	9	6
	8 to 9 years	15	11	10	8	5	10	8	5	4	3
	> 9 years	22	17	13	10	9	17	13	5	4	2
Years of experience in management roles	≤ 5 years	10	8	8	6	2	9	7	1	1	0
	5 to 15 years	53	40	35	27	18	39	30	14	11	7
	16 to 25 years	47	36	33	25	14	34	26	13	10	8
	26 to 35 years	16	12	11	8	5	11	8	5	4	3
	36toa 40 years	3	2	3	2	0	2	2	1	1	1
	> 40 years	3	2	2	2	1	2	2	1	1	0

CEO characteristics		Total		Origin of the new CEO
		Total		Internal CEO		External CEO		Difference
		Mean or proportion	Standard deviation	Mean or proportion	Standard deviation	Mean or proportion	Standard deviation	Mean or proportion	t test
Gender	Man = 1	0.96	0.19	0.97	0.18	0.95	0.22	-0.02	-0.48
Post	MBA/Post-graduate/Master’s/ Ph.D. = 1	0.61	0.49	0.55	0.50	0.73	0.45	0.17	1.84*
Train	Engineering = 1	0.39	0.49	0.37	0.49	0.45	0.50	0.08	0.87
Edu	Schooling (years)	6.15	2.54	5.91	2.60	6.70	2.34	0.79	1.71*
Exp	Management roles (years)	16.96	9.51	17.14	9.89	16.55	8.69	-0.59	-0.34

CEO characteristics		Total		Fame/recognition of the new CEO
		Total		Normal CEO		Superstar CEO		Difference
		Mean or proportion	Standard deviation	Mean or proportion	Standard deviation	Mean or proportion	Standard deviation	Mean or proportion	t test
Gender	Man = 1	0.96	0.19	0.96	0.20	0.97	0.17	0.01	0.34
Post	MBA/Post-graduate/Master’s/ Ph.D. = 1	0.61	0.49	0.61	0.49	0.60	0.50	-0.01	-0.09
Train	Engineering = 1	0.39	0.49	0.35	0.48	0.51	0.51	0.16	1.70 *
Edu	Schooling (years)	6.15	2.54	6.14	2.65	6.17	2.24	0.03	0.06
Exp	Management roles (years)	16.96	9.51	16.30	9.66	18.80	8.95	2.50	1.39

Company performance (result prior to the date of the event)		Total		Fame/recognition of the new CEO
		Total		Normal CEO		Superstar CEO		Difference
		Mean or proportion	Standard deviation	Mean or proportion	Standard deviation	Mean or proportion	Standard deviation	Mean or proportion	t test
ROA	Return on Assets	-2.18	12.51	-4.14	13.84	4.93	7.26	9.07	4.74***
Lev	Debt over NE	110.39	117.11	103.19	119.89	105.80	107.65	2.61	0.12
E/S	Earnings per Share	-24.90	80.62	-29.09	84.79	-8.22	54.81	20.87	1.62
M/B	Market-to-Book	1.79	2.04	1.74	2.18	2.66	2.44	0.93	1.95*
Siz	Ln Assets	15.60	1.83	15.11	1.90	16.46	1.49	1.35	4.18***
Gov	Governance = 1	0.75	0.43	0.71	0.46	0.89	0.32	0.17	2.02**

Company performance	Dependent variable: Fame/recognition of the CEO (superstar CEO = 1)
	Without winsorization				Data winsorized at 5%
	Logit		Probit		Logit		Probit
	Coefficient	Marginal effect	Coefficient	Marginal effect	Coefficient	Marginal effect	Coefficient	Marginal effect
Constant	-7.700***	-	-4.616***	-	-8.677***	-	-5.070***	-
Constant	(2.2405)		(1.3042)		(2.7171)		(1.5621)
ROA	0.0512	0.005	0.0292	0.005	0.1068**	0.016	0.0547**	0.015
ROA	(0.0314)		(0.0178)		(0.0467)		(0.0247)
Lev	-0.0004	0.000	-0.0002	0.000	0.0001	0.000	0.0000	0.000
Lev	(0.0013)		(0.0007)		(0.0025)		(0.0015)
E/S	0.0009	0.000	0.0004	0.000	-0.0043	-0.001	-0.0019	-0.001
E/S	(0.0013)		(0.0007)		(0.0048)		(0.0027)
M/B	0.1462*	0.014	0.0931*	0.016	0.1098	0.016	0.0750	0.021
M/B	(0.084)		(0.0517)		(0.1349)		(0.0807)
Siz	0.3480***	0.032	0.2067***	0.036	0.4106**	0.060	0.2373**	0.065
Siz	(0.1284)		(0.0752)		(0.1598)		(0.0929)
Gov	1.0398	0.080	0.6506*	0.093	0.8973	0.114	0.5887	0.140
Gov	(0.6571)		(0.374)		(0.6423)		(0.3723)
Pseudo-R²	21.0%		21.3%		21.8%		21.7%
LL	-58.3		-58.1		-57.7		-57.7
Observations	124		124		124		124

Characteristics of the new CEO		Nº CEO	CAAR [-1;+1]		CAAR [-3;+3]		CAAR [-5;+5]
Characteristics of the new CEO		Nº CEO	Mean	Standard deviation	Mean	Standard deviation	Mean	Standard deviation
TOTAL		132	0.09%	9.22%	0.31%	12.46%	-0.99%	13.40%
CEO’s origin	Internal	92	-0.77%	9.40%	-0.72%	12.78%	-1.90%	13.50%
	External	40	2.11%**	8.91%	2.71%**	11.87%	1.11%	13.35%
	Diff.		2.88%*	1.72%	3.43%	2.30%	3.01%	2.54%
Superstar CEO	Normal	97	0.03%	10.47%	0.67%	14.10%	-1.48%	14.78%
	Superstar	35	0.26%	4.21%	-0.71%	6.10%	0.36%	8.69%
	Diff.		0.23%	1.28%	-1.38%	1.76%	1.84%	2.10%

Variables	Dependent variable: CAR with 100-day prediction window Variables of interest: CEO origin and superstar CEO
	(1)	(2)	(3)	(4)	(5)	(6)
	CAR(-1;1)	CAR(-3;3)	CAR(-5;5)	CAR(-1;1)	CAR(-3;3)	CAR(-5;5)
Constant	0.0317	-0.0238	-0.0113	0.0142	0.0010	-0.0250
Constant	(0.0924)	(0.1089)	(0.1247)	(0.1018)	(0.1345)	(0.1398)
ROA	0.0016	0.0025*	0.0043***	0.0018	0.0033**	0.0056***
ROA	(0.0011)	(0.0014)	(0.0015)	(0.0013)	(0.0013)	(0.0015)
Leverage	0.0002**	0.0002**	0.0002*	0.0002*	0.0003**	0.0002
Leverage	(0.0001)	(0.0001)	(0.0001)	(0.0001)	(0.0001)	(0.0001)
Earnings per Share	0.0001	0.0001	0.0000	0.0000	-0.0000	-0.0002
Earnings per Share	(0.0001)	(0.0001)	(0.0002)	(0.0001)	(0.0002)	(0.0002)
Market-to-Book	-0.0147**	-0.0181***	-0.0254***	-0.0148***	-0.0190***	-0.0242***
Market-to-Book	(0.0058)	(0.0067)	(0.0075)	(0.0055)	(0.0067)	(0.0072)
Governance	-0.0371*	-0.0127	0.0070	-0.0349	-0.0135	-0.0076
Governance	(0.0219)	(0.0318)	(0.0318)	(0.0242)	(0.0340)	(0.0378)
Size (Ln Assets)	-0.0020	0.0020	-0.0051	-0.0031	0.0029	-0.0037
Size (Ln Assets)	(0.0056)	(0.0075)	(0.0079)	(0.0058)	(0.0082)	(0.0089)
Education	0.0036	0.0013	0.0064	0.0049	0.0017	0.0075
Education	(0.0044)	(0.0064)	(0.0072)	(0.0052)	(0.0074)	(0.0079)
Engineering Training	-0.0234	-0.0287	-0.0188	-0.0260	-0.0360	-0.0309
Engineering Training	(0.0170)	(0.0211)	(0.0243)	(0.0191)	(0.0239)	(0.0254)
Post-graduation	-0.0301	-0.0525*	-0.0668**	-0.0259	-0.0492	-0.0638*
Post-graduation	(0.0217)	(0.0288)	(0.0308)	(0.0244)	(0.0329)	(0.0352)
Gender	0.0593*	0.0985***	0.1403***	0.0569	0.0770	0.1036*
Gender	(0.0302)	(0.0357)	(0.0449)	(0.0354)	(0.0473)	(0.0559)
Experience	-0.0020**	-0.0036***	-0.0030**	-0.0022**	-0.0043***	-0.0036**
Experience	(0.0009)	(0.0011)	(0.0013)	(0.0008)	(0.0013)	(0.0014)
CEO_Origin	0.0471**	0.0560*	0.0659**	0.0494*	0.0399	0.0387
CEO_Origin	(0.0218)	(0.0292)	(0.0324)	(0.0255)	(0.0312)	(0.0373)
Superstar_CEO	0.0410**	0.0169	0.0540*	0.0368*	0.0066	0.0495
Superstar_CEO	(0.0197)	(0.0247)	(0.0299)	(0.0205)	(0.0271)	(0.0350)
Origin*Superstar	-0.0536**	-0.0573	-0.0918**	-0.0700**	-0.0486	-0.0772
Origin*Superstar	(0.0258)	(0.0377)	(0.0452)	(0.0303)	(0.0440)	(0.0552)
Dummy (year)	No	No	No	Yes	Yes	Yes
Dummy (sector)	No	No	No	Yes	Yes	Yes
Observations	124	124	124	124	124	124
R-squared	0.2495	0.2378	0.2454	0.3124	0.3058	0.3196

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The CEO’s origin and fame in relation to company performance and market perception* * Study presented at the XLV ANPAD Conference, October of 2021.

Abstract

The CEO’s origin and fame in relation to company performance and market perception^* * Study presented at the XLV ANPAD Conference, October of 2021.