Conducted by Brian Bolton, assistant professor of finance at the Whittemore School of Business and Economics at the University of New Hampshire, the new research is presented in the working paper "CEO Education, CEO Turnover, and Firm Performance." The paper is co-authored by Sanjai Bhagat of the Leeds School of Business at University of Colorado at Boulder, and Ajay Subramanian of the J. Mack Robinson College of Business at Georgia State University.
"These findings suggest that both boards and researchers should use caution in placing too much emphasis on an individual's education when trying to assess their ability to lead the company and maximize shareholder value," Bolton says.
The research analyzes the relationship between CEO education, CEO turnover, and firm performance. The researchers were primary interested in 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 whether CEO education significantly affects performance.
The researchers used 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 master's degree, and whether or not the MBA or law degree is from a top 20 program. The study includes nearly 15,000 years of CEO experience data and more than 2,600 cases of CEO turnover from 1992 to 2007.
The researchers found that CEO education does not play a large 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. For example, even after a CEO with an MBA degree gets fired for poor performance, the board still looks to replace him or her with new CEO who also has an MBA.
Hiring new CEOs with MBA degrees does lead to short-term improvements in operating performance. However, the researchers did 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.
"Even though CEO education does not lead to superior performance by firms, firms may rely on CEO education in hiring decisions because they have few other identifiable and measurable criteria to use. All else being equal, they rely on what they believe to be the observable pedigrees of the executive," Bolton says.
"Of course, all else is rarely equal, especially when dealing with something as nebulous and potentially unobservable as managerial talent. Interpersonal skills, leadership ability and strategic vision are among the traits that CEOs should possess; these can be difficult to identify and even more difficult to measure. As a result, boards rely on those characteristics which they may be able to observe: work experience, track record, and education," he says.
The UNH Whittemore School of Business and Economics offers a full complement of high-quality programs in business, economics, accounting, finance, marketing, and hospitality management. Programs are offered at the undergraduate, graduate, and executive development levels. The school is accredited by the Association to Advance Collegiate Schools of Business, the premier accrediting agency for business schools worldwide. For more information, visit http://wsbe.unh.edu/.
The University of New Hampshire, founded in 1866, is a world-class public research university with the feel of a New England liberal arts college. A land, sea, and space-grant university, UNH is the state's flagship public institution, enrolling more than 12,200 undergraduate and 2,200 graduate students.
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The formation of stars in distant galaxies is still largely unexplored. For the first time, astron-omers at the University of Geneva have now been able to closely observe a star system six billion light-years away. In doing so, they are confirming earlier simulations made by the University of Zurich. One special effect is made possible by the multiple reflections of images that run through the cosmos like a snake.
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The quantum world is fragile; error correction codes are needed to protect the information stored in a quantum object from the deteriorating effects of noise. Quantum physicists in Innsbruck have developed a protocol to pass quantum information between differently encoded building blocks of a future quantum computer, such as processors and memories. Scientists may use this protocol in the future to build a data bus for quantum computers. The researchers have published their work in the journal Nature Communications.
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