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Business Driven by Personalities

How CEO personal characteristics influence company value

Knowing the CEO's personal characteristics can help predict their company's stock value, according to HSE researchers.

Their analysis of data on 100 CEOs of Russian companies reveals that an optimal high-level manager in Russia tends to be someone around the age of 50 who has served in this position for 4.5 years and has one or two children.

Human Factor

Research focusing on how employees influence a company's value is fairly recent in Russia, dating back less than 10 years. In the West, this line of research emerged in the mid-1980s with the Upper Echelon Theory by Donald C. Hambrick and Phyllis A. Mason.

Higher echelons are high-level managers whose decisions naturally reflect their personal values ​​and cognitive characteristics, which, in turn, correlate with observed features such as age, education, work experience, marital status, etc. Business performance and CEO characteristics are believed to be connected, leading to certain hypotheses suggesting that the following CEO characteristics can have a positive impact on the company’s bottom line:

 high level of education;
 nationality (locals tend to perform better than foreigners);
 age (middle-aged CEOs tend to be less risk-prone and more rational, and to use better judgment);
 prior employment (compared to an external appointment, someone who has been with the company for a while tends to be less radical in their decisions, and careful to preserve continuity and committed to corporate culture, as well as serving as a model of internal promotion);
 prior managerial experience;
 having a share in the company (co-owners tend to be more responsible and committed).

Scientific Approach

The authors tested the above hypotheses in the Russian context by studying the profiles of CEOs of 100 MICEX-listed companies, based on data from Viperson.ru, Finparty.ru, TAdviser.ru and other biographical resources, as well as CEOs' personal webpages and the Thomson Reuters database, in order to determine the role of age, education, nationality, prior employment and experience, business co-ownership, number of children and tenure in the current position.

They examined the relationship between these CEO characteristics and the respective companies' value using the ‘excess return on stock’ indicator which describes the difference between the actual and projected returns on stock and makes it possible to detect undervalued or overvalued stock during a particular CEO's period in office.

The researchers constructed two models for the analysis: one to demonstrate the so-called anomalous (i.e. higher than expected) stock returns, which are positively correlated with the CEO's performance, and the other one, based on the MICEX index, to determine each company's stock value under a particular CEO relative to the market average.

Who Brings Money

The Russian findings only partially confirm the above hypotheses, with factors such as CEO nationality, managerial experience and co-ownership of the business seeming to have no significance for the company's value.

In contrast, age, tenure in the current position, number of children and prior employment appear to make a difference:

 the best age for a CEO is found to be around 50.
 the golden mean for their tenure in office was estimated at 55 months (4,5 years). According to the researchers, "it takes time for a CEO to lead a company to high performance and maintain it for a considerable period."
 CEOs with one or two children tend to perform best, but their performance decreases with each subsequent child.
 stock value tends to be higher in companies led by internally-appointed CEOs rather than outsiders. Since education and managerial experience appear to be of low significance, the researchers  conclude that in Russia, successful CEOs are not necessarily experienced managers with good business education, but those "with an in-depth understanding of the current business, its specifics and structure."


October 24, 2017