CEO Education, CEO Turnover, and Firm Performance

The following post comes to us from Sanjai Bhagat, Professor of Finance at the University of Colorado; Brian Bolton of the Finance Department at the University of New Hampshire, and Ajay Subramanian of the Risk Management and Insurance Department at Georgia State University.

In the paper, CEO Education, CEO Turnover, and Firm Performance, which was recently made publicly available on SSRN, we analyze the effects of CEO education on CEO turnover (firing and replacement) and firm performance. Our primary interest is on the role that CEO education plays in a firm’s decision to replace its current CEO, the role that it plays in selecting a new CEO, and on whether CEO education significantly affects performance.

We use six main measures of CEO education: whether or not the CEO attended a Top-20 undergraduate school, whether or not the CEO has an MBA, law or masters‟ degree, and whether or not the MBA or law degree is from a Top-20 program. Our study includes more than 14,500 CEO-years and more than 2,600 cases of CEO turnover from 1993-2007.

Our results show that CEO education does not play a significant role in the decision by a firm to replace its current CEO; poorly performing CEOs are replaced, regardless of their education. Education, however, does play a significant role in the selection of the replacement CEO. There is a significantly positive correlation between the education levels of new CEOs and those of the CEOs they replace. Further, hiring new CEOs with MBA degrees leads to short-term improvements in operating performance. However, we do not find a significant systematic relationship between CEO education and long-term firm performance. CEO education does not seem to be an appropriate proxy for CEO ability. Our results lead to the puzzling implication that, while CEO education appears to play an important role in the hiring of CEOs, it does not affect the long-term performance of firms.

The full paper is available for download here.

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