Should your next CEO be a PhD? PhD CEOs and firm performance
Corporate governance literature is abound with studies examining the personal characteristics of Chief Executive Officers (CEOs) and which of them drive decision making and influence firm performance. The idea that the experience, demographic and psychological characteristics of managers' shape their values and strategic decision making is commonly accepted. One life experience that has received limited attention however is the education of a CEO.
The higher education received by a CEO is an important determining factor on the personality and skills of an individual as this may be the last formal education they receive before they enter the work place. Recently published research in this area examined CEO educational qualifications for FTSE 350 firms, the types of degrees held by all CEOs and whether the awarding institution is among the top 100 ranked universities in the world (according to the QS‐ranking system).
Findings from the study suggest that CEOs with undergraduate, postgraduate or MBA level education offer little explanatory evidence when explaining firm performance. However, CEOs with PhDs exhibit significantly higher firm performance compared with their peers without a PhD education. This suggests that CEOs who conduct a lengthy research‐based degree acquire skills and knowledge that enable them to perform better as a CEO compared with their peers – notably in areas such as controlling costs and cash flow management, and that those firms with a PhD CEO have statistically significant improved profit margins.
One claim often suggested is that the importance of CEOs network is a contributory factor to firm performance – the suggestion being that better connected CEOs are more active bidders in takeovers, more likely to move firms and conduct more M&A activities. However, the results of the research show that the CEO network is largely insignificant in determining firm performance, certainly compared to the CEO education factor – which remains statistically significant.
Neither can it be said that the impact of a PhD CEO is short-lived. The research examines how firms perform over a 3‐year window surrounding CEO turnover, with findings demonstrating that a firm with a PhD CEO improves performance at the 3‐year period and beyond indicating that the effect of PhD CEOs is also long lasting.
So just how much can a CEO with a PhD add to a firm? Factor analysis in the research suggests that a one standard deviation increase in PhD education is associated with a 1.20% increase in industry‐adjusted ROA, and that a CEO with a PhD improves performance by 3.03%, while a CEO with a PhD degree from a top 100 university improves firm performance by as much as 4.65%. This result is also present in transition firms, where firms that hire a CEO with a quality PhD improve performance by 4.20%.
From any number of perspectives, research findings suggest that CEOs who have completed a research degree have acquired the skills and knowledge that enable them to perform better as a CEO and deliver long-lasting benefit to firms. Firms profiling their future CEOs would be well advised to look for a PhD in the future.
Dr Hanxiong Zhang
Senior Lecturer in Finance
Hanxiong joined the Surrey Business School as a Senior Lecturer in Finance in February 2021. Hanxiong was previously a Lecturer in Financial Management at the University of Sheffield, and before that at the University of Lincoln and University of Newcastle upon Tyne. Hanxiong is also a PhD graduate of the University of Newcastle upon Tyne. Hanxiong’s research areas are in: corporate governance, FinTech, and financial economics. He has published in the Journal of Corporate Finance; European Financial Management; European Economic Review; British Accounting Review; Review of Quantitative Finance and Accounting; Financial Markets, Institutions and Instruments amongst others. Hanxiong is also a CFA charterholder, a FRM charterholder and a Senior Fellow of the HEA (SFHEA).