Scholars Link Success of Firms To Lives of CEOs

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.

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 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.

Some investors say they'd welcome personal data about CEOs if it weren't too intrusive. "Prying into people who have a kid with leukemia, that's a bit of an invasion," says Scott Black, president of Delphi Management Inc., a Boston money manager. But Mr. 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.

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