CEO’s Family Upbringing Predicts Performance

Do you want your CEO coming from a wealthy, well connected family or a poor family? Most people have never considered this question, but it has relevance to the organizations leadership and the decision making of the titans of industry in America. Many believe that the harder you have to work for something the more you deserve it and that is exactly what appears to be going on here.

In a remarkable new study, From Playground to Boardroom: Endowed Social Status and Managerial Performance, Du begins by estimating the CEO’s family wealth by using place of residence at the time he or she graduated from high school. Using census data, birth certificates, yearbooks, and other publicly available data Du is able to  create a sample of over 500 CEO’s of the largest companies in the US. Next he creates a quantitative metric for firm performance made up of a firm’s operating return on assets, asset turnover, earnings surprise, stock returns, and the number and quality of M&A deals completed during the CEO’s tenure in office.

The results are pretty amazing. As the author states, “My main empirical finding is that CEOs born into poor families outperform those born into wealthy families.  My evidence is consistent with the argument that less advantaged individuals face dramatically higher barriers to entry into managerial positions and that only most highly skilled and highly motivated candidates among them can succeed.”

It appears that while CEO’s from wealthy families have better connections and resources, private schooling, and obtain their position of power earlier in life they simply cannot compete with CEO’s who have had to work harder and smarter to make it to the top..

When someone from a  disadvantaged background makes it to the top of an organization they are likely to perform better than someone who grew up with a “silver spoon” on a variety of proxies for firm performance.

From Playground to Boardroom: Endowed Social Status and Managerial Performance
Fangfang Du
Working paper, 2017

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