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Scholars Link Success of Firms To Lives of CEOs - WSJ.com

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LEADER (U.S.)

September 5, 2007 PERSONAL MEASURE

Scholars Link Success of Firms To Lives of CEOs

A Family Death Hurts, Studies Say, as Does Buying a Mansion
By MAR K MAR EMON T

Should shareholders in a company care if the chief executive's child dies? What if the mother-in-law passes away? Such things don't normally figure in investment decisions. But maybe they should, according to a recent study by three finance professors. Mining a trove of Danish government data on thousands of businesses, they were able to track links between CEO-family deaths and the companies' profitability over a decade. It slid by about one-fifth, on average, in the two years after the death of a CEO's child, and by about 15% after the death of a spouse. As for an executive's mother-in-law, the old jokes seem to hold: The researchers found that profitability, on average, rose slightly after her demise. The study is part of an emerging -- and controversial -- area of financial research that delves into the lives and personalities of executives in search of links to stock prices and corporate performance. The trend is an outgrowth of the tendency to lionize CEOs as critical to the businesses they lead. If their performance is so vital, the researchers say, investors should want to know anything that could affect it. "When you go to the track, you study the horse," says David Yermack, a New York University finance professor. "Investing is not that different. You want to know as much as you can about the jockey." A study he co-wrote looked at executives' home purchases. It found that on average, the stocks of companies run by leaders who buy or build megamansions sharply underperform the market. The researchers don't claim to know why. They theorize that some of these executives might be focused more on enjoying their wealth and less on working hard. One CEO looked at was Trevor Fetter of Tenet Healthcare Corp., who bought a 10,057-square-foot manse in the Dallas area around the start of 2005. Since then, Tenet's stock is off more than 60%, while the broader market has risen. A spokesman for the hospital chain said it was aware of the study but had no comment. Other academics have found underperformance, in both profits and stock prices, at companies led by executives who received awards such as best-manager kudos from the business press. The theory: Once they become stars, some CEOs may pay more attention to writing memoirs and sitting on outside boards and a little less to running their companies. Two Penn State professors recently attempted to rate CEOs of technology companies on their degree of narcissism. They looked at things like the size of executives' photos in annual reports and how often they use the first person singular in press interviews. The authors concluded that narcissistic executives tended to take greater risks, leading to bigger swings in profitability of their companies. The study, called "It's All About Me," is to be published in Administrative Science Quarterly.

Read the Research Papers

"Where are the Shareholders' Mansions?" by Crocker Liu and
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The new line of research raises thorny privacy questions. If it intensifies, could CEOs' lives be plumbed like those of politicians and movie stars? Researchers say an area ripe for study is the possible effect of divorce and "trophy wives" on
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Scholars Link Success of Firms To Lives of CEOs - WSJ.com

David Yermack "Do CEOs Matter?" by Morten Bennedsen, Francisco PrezGonzlez and Daniel Wolfenzon "Superstar CEOs" by Ulrike Malmendier and Geoffrey A. Tate "It's all about me: Narcissistic CEOs and their effects on company strategy and performance" by Arijit Chatterjee and Donald Hambrick

business success. "I find it hard to imagine if I had a sick child that would be anybody's business," says Jerry W. Levin, chairman of Sharper Image Corp. and former CEO of Revlon Inc. "To assume that because something is going on in my personal life it's going to affect my business -- it's crazy. I wouldn't even ask those kinds of questions about my own employees, my own executives." On the other hand, executives might be cheered to know the studies generally conclude CEOs do matter to their companies' performance. That might bolster their side in the great debate over the magnitude of executive pay.

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Vote: How important is the

Some investors say they'd welcome personal data about CEOs if it weren't too intrusive. "Prying into people who have a kid with CEO to a company's success? leukemia, that's a bit of an invasion," says Scott Black, president The Juggle: CEOs, Just Like of Delphi Management Inc., a Boston money manager. But Mr. Us? Black says he shies away from companies that spend lavishly on headquarters and furnishings. And if he found out a CEO had bought a mansion or yacht or a $20 million painting, he says, that "would be of interest" to him. The new research is part of a more nuanced approach to studying management. Instead of assuming all CEOs are devoted to maximizing wealth for themselves or shareholders, researchers posit that executives can have other aims, like building a legacy or showing off wealth through a mammoth house. These may be perfectly rational behaviors, but hardly ones that are in shareholders' interest. The Internet, of course, has made research into homes, marriages and deaths far easier. Thanks to commercial and government databases, this no longer means haunting dusty courthouse record rooms. Prof. Yermack and Crocker Liu of Arizona State University set out to find real-estate records on the CEOs who were running all of the S&P 500 companies at the end of 2004. They scoured electronic records of taxes and deed transfers. When they couldn't find a home address, they turned to databases on voter registration rolls and campaign contributions. Eventually they found the addresses of 488 of the 500 executives. The median size of their principal homes was a little over 5,600 square feet. Some were far bigger. A key finding was that stock performance tended to deteriorate after a CEO bought or built an extremely large or costly estate, which they defined as over 10,000 square feet or sited on more than 10 acres. On average, these companies' stocks underperformed the S&P 500 index by about 25 percentage points over the three years after the purchase. The researchers used aerial photos available on the Internet to find swimming pools, tennis courts, boathouses and other amenities. One such photo, of the home of Limited Brands Inc. CEO Leslie Wexner, clearly showed an equestrian ring. Mr. Wexner started buying the first part of the 300-plus-acre estate near Columbus, Ohio, in 1987, the researchers say. Limited stock fell slightly in the following three years, while the S&P 500 index rose about 15%. The estate now includes a 22,371-square-foot house, according to county records. A spokeswoman for Limited said the company and Mr. Wexner wouldn't comment. Government records show Stephen Bollenbach, chief executive of Hilton Hotels Corp., bought a 12,854-squarefoot house in the Bel Air section of Los Angeles in January 1997. Over the following three years, the S&P 500 went up more than 75%, but Hilton's stock fell about 70%. The hotel company later rebounded, and recently agreed to be taken private by Blackstone Group. A Hilton spokeswoman declined to comment. The declines were averages. Some executives who bought mansions saw their stocks rise afterward. The
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Scholars Link Success of Firms To Lives of CEOs - WSJ.com

researchers don't claim a direct causal link between a home purchase and a company's stock. "It's whatever is driving the CEO to want to live in a mansion, which to a certain extent is very hard to observe," says Prof. Yermack. The purchase might signal that the executive is entrenched in his position, he says, or may prefer leisure to work. Another speculation: In a few cases, costly real-estate purchases might provide cover that enables CEOs who are dubious about their companies' prospects to sell a lot of stock without arousing suspicion. To Frederick E. "Shad" Rowe Jr., a money manager and head of an activist-investor group called the Investors for Director Accountability Foundation, the real-estate study "makes perfect sense." A CEO buys a huge house, "then he needs to hire a decorator, then a landscape architect," Mr. Rowe says. "You spend a lot of time and energy that you could be spending running the company." Prof. Yermack says he has received numerous requests from investors for copies of the paper, titled "Where are the Shareholders' Mansions?" He and Prof. Liu say it would be easy to build a simple trading strategy to profit from the edifice complex. One could track CEOs' house purchases through public records, bet against the stocks of companies whose chiefs bought or built megamansions, and buy the stocks of firms whose executives have more modest housing tastes. The professors calculated that doing that would have outperformed the market by about 15 percentage points a year. In contrast to real estate, studying the effects of family deaths on performance might seem unusually intrusive. Three professors who did so were trying to figure out how much chief executives matter to their companies' performance, versus the many other factors. "The idea of this was to find a random event that hits a CEO and evaluate the performance of the firm before and after this shock," says coauthor Daniel Wolfenzon, an associate finance professor at New York University's Stern School of Business. "You have exactly the same CEO and the same firm. The only difference is that there is a shock." Denmark's government collects large amounts of personal information on citizens, from job status to death records. It also requires every company, even private ones, to make some financial data public. After years of lobbying, the researchers gained access to Danish data, and identified CEOs who had faced a death in the family. They wondered if grief or distraction might have affected companies' subsequent profitability. The greatest change followed a death of a CEO's child. On average, profitability, as measured by operating return on assets, was roughly 21% lower in the two years after such an event than in the two years before it. The drop was sharper when the child was under 18, and greater still if it was the death of an only child. Gerald M. Levin was chief executive of Time Warner Inc. in 1997 when his grown son was murdered. "Of course I went into a tailspin," he said. "I made...I won't call it a mistake. I returned to what for me was a narcotic, I returned to work. I worked 25 hours a day." He said he couldn't judge whether his performance was affected but notes that he felt drained of emotion, as though "nothing that happened could affect me anymore." Mr. Levin's grief didn't correlate with a drop in Time Warner's stock price, which greatly outperformed the broader market during the three years after his son's murder. Asked about the study by Prof. Wolfenzon, who did it with Morten Bennedsen of Copenhagen Business School and Francisco Prez-Gonzlez of the University of Texas, Mr. Levin said it "sounds sensible," but "I'm still skeptical, because there are so many other factors." Mr. Levin said there is immense pressure on executives to hide personal problems, a situation he feels should change. He now helps run a holistic wellness center in California focusing on helping people recover from traumas and other upheavals. Although he isn't sure that grief would distract a top executive from his work, he said, "not enough attention is being paid to the personal situation of a CEO. These are individuals....It's important to understand they're not automatons."
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Scholars Link Success of Firms To Lives of CEOs - WSJ.com

In the study, a CEO's parent's death also was followed by a decline in the company's return on assets, though a smaller drop than after the death of a spouse or child. Overall, the profitability drops were sharper at companies headed by female CEOs. The researchers say they're not clear why. Only a mother-in-law's death was correlated with an upturn, and it was too small to be statistically significant. Prof. Wolfenzon says they included the mother-in-law as a rationality check. "It's a little bit funny that the mother-in-law dying doesn't distract the CEO," he said -- hastening to add that his own mother-in-law is vitally important to his productivity: "As we speak, she's taking care of my kids." It isn't clear how applicable the study is to big public companies in the U.S. or elsewhere, the authors acknowledge. Most of those studied were small, family-controlled ones where a shock to the CEO might have more impact, though Prof. Wolfenzon said the effects appeared similar across all sizes of Danish companies. Could investors take advantage of the study's conclusions by watching death registries, or even spying on hospital admissions? Prof. Wolfenzon says such information is much tougher to find in most countries than in Denmark. But, he muses, "because the data is so difficult to get, it may not be factored into prices. That makes it a more attractive investment strategy." Write to Mark Maremont at mark.maremont@wsj.com

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