A few years back The Wall Street Journal ran a very interesting article about the personal lives of company CEOs, and the impact of those lives on the price of their company's stock. The article, backed by a number of independent studies, suggested that the life and lifestyle of the CEO is pivotal to the company's future stock performance. This claim seems straightforward enough, but the researchers were very specific about their findings, and about how their results could be used to anticipate stock movements.
One of the studies, "Do CEOs Matter," focused on the effect of trauma on the CEO and that company's future stock price. As you can see at left, the death of a child was the most damaging. The impact was worse if the child was under 18, and worse still if it were an only child.
The impact of the loss of a spouse was somewhat less than the loss of a child although still very material, and the loss of a parent less still. A pleasant surprise: The death of the CEO's mother-in-law actually improved the stock's performance.
These results were not definitive, and were based on the average evolution of the CEOs' stock price, but the results were material and compelling. One finding not discussed in the article but highlighted in the research itself regarded the death of the CEO him or herself. Such an event, according to the study, "is likely to cause a statistically significant and economically large decline in firm profitability... equivalent to a 9.6 percent decline... significant to the one-percent level." In other words, the death of the CEO has a significant negative impact on the price of the stock.
Of course, the effect of these traumatic events is not set in stone. When the son of Time Warner (TWC) CEO Gerald Levin was murdered in 1997, Levin reported acute stress to the point of a personal "tailspin," but the stock price actually outperformed the market. Similarly, when Coca-Cola's CEO (KO), Roberto Goizueta, suddenly died of lung cancer in 1997, Coke's stock continued in lockstep with the stock averages. But on balance, the impact is real enough, and measurable.
It is impossible to reflect on this study and not think of the passing of Steve Jobs and his impact on Apple (AAPL). A measure of his talent as a leader is the care with which he managed the company's transition to the stewardship of Tim Cook. His death was certainly not unexpected, so there was ample time to manage the change at the top. It may well be that Apple will overcome the odds: Since Jobs' death on October 5 of last year, the stock has risen more than 17%.
But it wasn't only a CEO's personal misfortune that led to a decline in his company's stock price. In fact, a separate study by Liu and Yermack focused on the effect of the finer things in life on the CEO, and found a similar result.
In particular, the study examined the impact of what we could call CEO excesses on the price of that CEO's stock, and the results painted a similar picture. The study noted that personal extravagances led to a depressed stock price. CEOs who splurged on a huge house tended to oversee significant stock declines following the purchase, whereas the stock of CEOs who maintained modest dwellings, on average, did much better.
One example of this phenomenon is Hilton Hotels CEO Stephen Bollenbach, who bought a 12,854-square-foot house in Los Angeles in January 1997. Three years later Hilton's stock had fallen about 70%, while the S&P500 rose more than 75% over the same period. Seven years later, in July 2007, the Blackstone Group (BX) agreed to take Hilton private, and the company went into Blackstone's control.
But in surrendering to a new parent, Hilton may have been father to the man. Just months before Blackstone's Hilton acquisition, Blackstone CEO Steve Schwarzman threw himself a lavish $3 million 60th birthday party, highlighted by a 30-minute performance by Rod Stewart and attended by the mayor of New York, along with hundreds of others. Then came the hangover: Four months later, on June 22, Schwarzman presided over the firm's historic IPO. The stock made its debut at $31; less than two years later it was worth $4.
By and large, these studies succeed in proving what we already know: CEOs are human. Warren Buffett and Steve Jobs lived in modest ranch houses and thrived. Tyco CEO Dennis Kozlowski threw multimillion-dollar toga birthday parties and was, well, less successful. As investors, we have to pay attention to the man at the helm of the ship if we want to avoid the icebergs.