It’s common for the education of candidates to play a big role in who gets the top job in organizations. Alas, research from the University of St Andrews suggests that the education of CEOs plays less of a role than we might think in their ultimate success.
The study indicates that possessing a top academic degree, namely a Ph.D. or an MBA, as a CEO does not necessarily lead to better performance for firms, according to the findings. However, when examining Initial Public Offerings (IPOs) in the United States between 1998 and 2018, the researchers discovered that companies with CEOs holding a Ph.D. or an MBA had three-year post-listing returns that were 12% and 11% greater than the average issuer, respectively.
Educational returns
However, these figures mask a crucial distinction, as the impact varies depending on the size and age of the issuer. A Ph.D. appears to have a greater impact on IPO performance when innovation and specialized knowledge are prioritized, such as in small, young, or research and development-focused companies. On the other hand, an MBA is more beneficial when management abilities are required to manage a larger firm size and organizational complexity.
“It has always been assumed that CEO education drives investor valuations up and these studies invariably treat education like a commodity,” the researchers explain.
“Our findings challenge this notion and caution that a stellar academic background is beneficial only to the extent that it can cater to specific organizational priorities; ultimately, what market investors value are the skillsets honed by the various education types, rather than scholastic achievement per se. This should have resonance for firms recruiting for the top executive position.”
Specific benefits
According to the study, obtaining specialized education through a Ph.D. degree adds value to small and/or young firms where entrepreneurship is vital. In addition, in industries that rely heavily on research and development, firms with CEOs holding a Ph.D. are given higher valuations because specialized knowledge is often associated with individuals who are more receptive to new ideas, embrace technology, and take more risks compared to their non-expert counterparts.
The opposite is true for CEOs with an MBA degree, which has the greatest effect on valuation for larger and more established firms. This is supported by additional evidence from the use of venture capital, which shows that CEOs with a Ph.D. are more likely to collaborate with VC firms that offer complementary management expertise.
“Our results suggest that IPO investors remain indifferent to CEO education if this is unrelated to the issuer’s main organizational and environmental challenges, which explains the inconclusive evidence of prior research,” the researchers conclude.
“More generally, our findings can guide nomination committees and the practice of informed corporate governance, which is crucial given the ubiquity of candidates with top-notch academic qualifications. Finally, understanding the conditional role of education is of fundamental importance for providers of academic services and the executive job market alike.”
