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Recession CEOs Have an Edge, Study Says

A recession may not be such a bad thing for CEOs. Especially at the start of their careers.

New research indicates that the market is more likely to value leaders who got their first crack at the top job when the economy was going backwards.

The analysis of 2,249 CEO turnovers at S&P1000 firms was conducted by Antoinette Schoar from the MIT Sloan School of Management and Luo Zuo from Cornell University.

“Companies that hired a CEO who’s first job was during a recession experienced an average industry-adjusted 0.87% increase in their share price within three days of the announcement of their selection.”

They found companies that hired a CEO who’s first job was during a recession experienced an average industry-adjusted 0.87% increase in their share price within three days of the announcement of their selection. CEOs with a non-recession background triggered a 0.05% share-price fall.

The benefit was even more pronounced when a company replaced a non-recession CEO with a recession CEO, an event which led to a 1.19% stock-price bounce.

Sure, a CEO’s own personality, or what the authors describe as their endogenously acquired characteristics, will have a large bearing on their management style. One older study, for example, found that managers with an MBA tend to follow more aggressive management strategies, such as taking on higher leverage.

But previous work by Schoar and Zuo found that CEOs who started their career during a recession had a more conservative management style, investing less in capital expenditures and R&D, showing lower overheads and taking on significantly less leverage.

This new study indicates such skills aren’t that common, given share-price bounces generally only occur when the market is surprised.

“Our results show that the announcement of a recession CEO hire is seen as unexpected good news for a firm, most likely since this skill set is in short supply in the market and the announcement confirms that the firm was able to hire this type of CEO,” the authors said.

“But it also implies that the market believes that this particular style has a value added for the firm.”

About Ross Kelly

Ross Kelly
Ross Kelly is a London-based business journalist. He has been a staff correspondent or editor at The Wall Street Journal, Yahoo Finance and the Australian Associated Press.