CEO child deaths as a leading economic indicator? Come on Universtity of Michigan!!

I read the abstract of the paper (not the full version, since it’s not free, otherwise I would). I don’t buy their methodology for identifying the comparison group CEOs. They chose ones “who had similar characteristics and performance to the award winners in terms of company size, book-to-market and returns over the year leading up to an award.”

First, “book to market” is not a good measure. “Book” can and often is non-comparable by virtue of goodwill. It’s a peculiar measure of stock price performance. Similarly, they don’t mention what other measures they used for “performance”.

This begs the question that these “peers” may not have been close peers at all. And how were the industries defined? Some companies have no close comparables. How would you find a comparable to GE, a multi-industry manufacturer which gets about 40% of its income from financial services? Some have criticized Jim Collin’s Good to Great peer analysis because he had only one peer for each of his chosen companies (the MIT work is silent as to whether they had one or more peers).

Phil Rosenzweig, in his excellent book The Halo Effect, discusses how companies that are identified by the media and experts as high performers are seen as doing everything right, until performance slips and they are suddenly depicted as doing everything wrong. The Halo Effect is a well-documented psychological tendency of humans to fail to discriminate among performance vairables.

One example Rosenzweig discusses in detail is Cisco, which suffered badly in the dot com bust. Cisco was portrayed as brilliantly run when it was doing well, and terribly run when the dot coms came apart. But nothing had changed in the way it was run. Its market had fallen apart. It was the attributions about its performance that had changed.

So I’m not convinced by what I read about the peer analysis. And note they did use a stock market price measure as one of their measures. Stock prices move in parallel with media coverage. It may be that the CEOs who got awards were in companies that were media darlings (that’s why they got the awards) and then the media turned on them.

A lot of people similarly use magazine covers as the sign of when to sell a stock, particularly a Business Week cover. The notion is by the time Business Week is on to a trend, it’s past its sell-by date. The same may be true for the award givers in enough cases to skew the results: they only select CEOs with a well established run of outperformance, one that is soon due to revert to the mean.

The point is it doesn’t matter whether any of my theories are correct. The point is there are alternate theories to explain the phenomenon. Saying or suggesting that correlation is causation is bogus. Anyone who is a decent researcher, including the guys who wrote these papers, should know that, as should the Journal.

-A-

http://blogs.wsj.com/informedreader/index.php?s=superstar&x=0&y=0

Of course, the studies showing underperformance when a CEO buys a bigger house or gets cited in the business press will be quickly dismissed as quack research done by a bunch of hacks with no merit whatsoever.