Sep 15, 2007

CEOs private life and companies profitability

I really don't think there should be research that is so....well, intrusive. But this surely goes to show CEOs apart from movie stars and politicians really can't claim to have any part of their life private. :(

Via AESC's SearchWire

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.

Of course, the standard disclaimer should be displayed to all such research. The one that states - correlation does not imply causation. That is the thing investors and business managers need to keep in mind whenever such research hits the street !