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Does a better education make for better managers?

An
empirical examination of CEO educational quality and
firm performance
Aron A. Gottesman Matthew R. Morey
Department of Finance Department of Finance
Lubin School of Business Lubin School of Business
Pace University Pace University
One Pace Plaza One Pace Plaza
New York, NY 10038 New York, NY 10038
agottesman@pace.edu mmorey@pace.edu
April 11, 2006
Abstract
This paper represents the first attempt, to our knowledge, to empirically examine the relationship
between the quality of Chief Executive Officer (CEO) education and firm performance. This is
an important question as many papers in the management literature have postulated that
managers with higher educational attainment will be more adaptive and innovative, and more
likely to possess other characteristics that may improve firm performance. We find four results in
our analysis. First, using the mean entrance scores as proxies for the prestige of undergraduate
and graduate programs, we find no evidence that firms with CEOs from more prestigious schools
perform better than firms with CEOs from less prestigious schools. Second, we find that firms
managed by CEOs with MBA or law degrees perform no better than firms with CEOs without
graduate degrees. Third, we find some limited evidence that firms led by CEOs with non-MBA,
non-law graduate degrees have slightly better risk-adjusted market performance than other firms.
Fourth, we find that compensation is somewhat higher for CEOs who attended more prestigious
schools.
Does a better education make for better managers? An
empirical examination of CEO educational quality and
firm performance
This paper represents the first attempt, to our knowledge, to empirically examine the relationship
between the quality of Chief Executive Officer (CEO) education and firm performance. This is
an important question as many papers in the management literature have postulated that
managers with higher educational attainment will be more adaptive and innovative, and more
likely to possess other characteristics that may improve firm performance. We find four results in
our analysis. First, using the mean entrance scores as proxies for the prestige of undergraduate
and graduate programs, we find no evidence that firms with CEOs from more prestigious schools
perform better than firms with CEOs from less prestigious schools. Second, we find that firms
managed by CEOs with MBA or law degrees perform no better than firms with CEOs without
graduate degrees. Third, we find some limited evidence that firms led by CEOs with non-MBA,
non-law graduate degrees have slightly better risk-adjusted market performance than other firms.
Fourth, we find that compensation is somewhat higher for CEOs who attended more prestigious
schools.
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I. Introduction
This paper attempts to answer the question of whether educational background of the Chief
Executive Officer (CEO) matters to firm performance. As such, we are extending a stream of
research that has examined the impact mutual fund managers educational background on mutual
fund performance (see Golec (1996), Chevalier and Ellison (1999), and Gottesman and Morey
(2006)) to CEOs. This research generally finds that educational background actually does matter
in terms of mutual fund manager performance as managers with stronger educational profiles
(managers from better schools) produce better risk-adjusted performance than other managers.
The question this paper tries to answer is whether this same effect occurs with CEOs.
Why should CEO educational background matter in terms of firm performance? One
obvious reason is that education background may proxy for intelligence, and more intelligent
managers may be better managers. Indeed, there are a number of studies which find that CEOs
with higher educational attainment have a greater capacity to process information and to
innovate than CEOs with lower educational attainment.
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Another reason is that more highly
educated CEOs may be more likely to use sophisticated methodologies that may improve firm
performance. For example, it has been demonstrated by Graham and Harvey (2002) that top
executives are more likely to use sophisticated methodologies when conducting capital
budgeting and when estimating the cost of capital. Finally, it may be that CEO education is
positively related to the CEOs social capital. That is, CEOs with higher educational profiles
enjoy more social ties to other CEOs and government officials, which may improve the
performance of the firm.
On the other hand, there are strong reasons to suspect that the educational background of
a CEO bears little or no relation to their performance. For instance, it may be that since all CEOs
have achieved a high level of success in their work lives, their educational backgrounds do not
matter in terms of firm performance. That is, since all the CEOs have attained a great deal of
success is does not matter to firm performance if they graduated from Harvard Business School
or are a high school drop out. Furthermore, it may be that personality traits that are not directly
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Kimberly and Evansiko (1981), Bantel and Jackson (1989), Hitt and Tyler (1991), Thomas et. al. (1991),
Wiersema and Bantel (1992), and Wally and Baum (1994) have found that more educated CEOs are better able to
process information and are more receptive to change than CEOs with lower educational attainment. In addition,
Barker and Mueller (2002, p. 787) state in a survey of the literature that the prevailing pattern of results suggests
that more educated CEOs will have preferences towards higher R&D spending as part of being more receptive to
innovation.
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developed by education such as charisma, collegiality, effort, etc. may be more important in
producing superior firm performance.
How does one measure the quality of CEO education? The answer is not straightforward
as a high quality education can be attained at any school and even without attending a formal
academic institution. Our approach is to define educational quality in two ways. First, we define
educational quality by the level of educational attainment. Hence, CEOs with graduate degrees
are assumed to have higher quality educations than CEOs without graduate degrees. Second, we
define educational quality by the prestige of the schools from which the CEO graduated. To
define prestige we use an approach similar to Chevalier and Ellison (1999) and Palia (2000) in
which we extract the mean SAT, GMAT, and LSAT scores of the undergraduate and graduate
schools from which the CEO graduated. Our assumption is that since more prestigious schools
generally have higher entrance requirements, the use of mean test scores captures the educational
prestige of the CEO education. Using this logic, a CEO who graduated from a high mean SAT
undergraduate institution would be said to have a higher quality education than a CEO that
attended a low mean SAT undergraduate institution. Similarly, a CEO who graduated from a
high mean GMAT business school would be said to have a higher quality education than a CEO
who graduated from a low mean GMAT business school.
To conduct the study we survey all firms listed on the New York Stock Exchange and
gather those firms for which the CEO of the firm has at least an undergraduate degree. Then,
using the measures of educational quality described above, we examine how educational quality
is related to five common measures of firm performance as well as to CEO compensation.
The rest of this paper is organized as follows. Section II presents a brief literature review
of the previous research on the relation between CEO education and its impact on the firm.
Section III describes the data and Section IV explains the methodology used in the study. Section
V presents the results and we conclude with Section VI.
II. Literature Review
In the academic press there has been some interest in discerning how CEO education influences
the firm. Most of this interest has come from the management area and generally examines how
the CEOs education influences the organizational structure of the firm. For example, one area of
research finds that the educational attainment of the CEO is a reasonable proxy of the cognitive
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abilities of the CEO. Indeed, several papers in the management literature (Kimberly and
Evansiko (1981), Bantel and Jackson (1989), Hitt and Tyler (1991), Thomas et. al (1991),
Wiersema and Bantel (1992), and Wally and Baum (1994)) find that CEOs with graduate
degrees have a greater capacity to process information and are more receptive to change than
CEOs with lower educational attainment. While these papers do not explicitly examine firm
performance, they do implicitly argue that firms with highly educated CEOs will perform better
than other firms. For example, they do find that more innovative companies are led by CEOs
with higher levels of educational attainment.
Another reason for the interest in CEO education is it may uncover certain behavioral
patterns of the manager that, in turn, can impact firm performance. For example, Tyler and
Steensma (1998), Finkelstein and Hambrick (1996), and Barker and Mueller (2002) find that
companies run by CEOs with degrees in technical fields have significantly higher funding of
research and development (R&D). Conversely, CEOs with educational backgrounds in business
or law tend to be more risk-adverse with regard to R&D. They also find that if the CEO came up
the ranks via technical or marketing channels then they were more supportive of R&D than
CEOs that advanced through the accounting, finance or legal channels. In another study, Graham
and Harvey (2002) find that chief financial officers (CFOs) holding MBAs were more likely than
other CFOs to use such learned techniques as net present value for capital budgeting and the
capital asset pricing model in cost of capital calculations. These results suggest that the type of
educational training can affect the managerial behavior of the CEO.
Yet another reason to examine CEO education is that it provides a measure, to some
extent, of the firms social capital. It is well known that education can be a strong indicator of
social prestige and class status. Indeed, one can surmise that a large part of why the CEO rose to
his or her position is due to their social network. In addition to using social capital for personal
advancement up the corporate ladder, research by Belliveau et. al (1996) and Burt (1992) finds
that CEOs with higher educational profiles enjoy more weak-ties to government officials and
other decision makers that can improve firm performance. For example, a CEO with strong
social linkages to politicians and policy makers can help the company receive government
contracts or favorable tax treatment.
Finally, CEO education may be related to firm type. In a paper that uses somewhat
similar methodology to ours, Palia (2000) measures the quality of CEOs by the prestige of their
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educational backgrounds. That is, CEOs who went to more prestigious schools (as determined by
school rankings) are assumed to be of higher quality. Using this logic, he finds that firms in non-
regulated industries disproportionately hire CEOs from more prestigious academic programs as
compared to firms in regulated industries. Palia provides two possible explanations for this
result. First, since non-regulated firms have fewer restrictions, the impact of the CEO on the firm
may be greater for a firm in a non-regulated industry than it would be for a firm in a regulated
industry. As a result, the non-regulated firms will tend to more hire high-quality CEOs, i.e., those
with more prestigious educational backgrounds, as compared to regulated firms. Second, non-
regulated industries have significantly higher CEO compensation than regulated industries
Consequently, those high quality executives with prestigious educational backgrounds will be
drawn to non-regulated industries and away from regulated industries. Whatever the actual
explanation, the results of Palias paper indicating that underlying firm characteristics can
influence the education background of the CEO are very relevant to this paper. While we do not
ask whether certain types of firms will hire certain type of CEOs, we do ask whether or not these
high quality CEOs, i.e., those CEOs with higher quality educations, imply better performance for
the firms that hired them.
III. Data
To facilitate the description of the data and methodology, this section is divided into three
subsections: CEO selection criteria and firm data; the out-of-sample period; and survivorship
issues.
III.A. CEO Selection Criteria and Firm Data
We extract CEOs from the EXECUCOMP database. We select all CEOs with U.S.
undergraduate degrees that managed NYSE-listed firms as of January 1, 2000. Moreover, we
require each of the firms managed by the CEO to have three years of stock return data prior to
January 1, 2000, i.e., 1997 through 1999, as some of our performance measures require in-
sample data (see Section IV.B. for more on this issue).
For each of these CEOs we then extract biographical information from the Register
Executives publication provided by Standard and Poors NetAdvantage database. This
information includes the CEO tenure, age, gender, and educational background. The educational
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background information provides the name of the educational institution where each CEO
received their undergraduate and graduate degrees, and whether the graduate degree was an
MBA, law degree, or other graduate degree.
2
Unfortunately, information on the undergraduate
field of study is unavailable.
For each of the CEOs we then identify several other education variables. First, we
identify the mean composite SAT score (math and verbal combined) associated with each CEOs
undergraduate school using the latest available data from the schools. Hence, while the CEO may
have graduated as many as 50 years earlier, we use the current mean SAT scores for their school.
In this way, we are implicitly making the assumption that the prestige of the school today (as
measured by SAT scores) is similar to that when the CEO graduated. While there are certainly
examples of schools that have improved or receded in terms of prestige, most schools that were
considered prestigious years ago are still so today. Second, similar to the SAT extraction, for
each CEO that completed an MBA we identify the latest mean GMAT score of the graduate
business school attended by the CEO. Likewise, for each CEO that completed a law degree we
identify the latest mean composite LSAT score of the law school attended by the CEO. We also
identify whether the CEOs undergraduate school was a liberal arts college. The process through
which we identify these educational variables can be found in Appendix A.
After selecting the CEOs and identifying their educational backgrounds, we next gather
firm level data. Using the above listed EXECUCOMP database, as well as the COMPUSTAT
and CRSP databases, we gather three types of firm level data over the period 1997-2002. First,
we gather the monthly returns of all of the firms. Second, we collect annual operational
performance measures such as total sales, Tobins q, ROA, ROE, liquidity and leverage.
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Third,
2
For some CEOs for which the graduate field of study was not easily identifiable, we performed
a general Internet search to identify each CEOs field of study, focusing primarily on business-
oriented publications such as Forbes.com, biographical sketches provided by the CEOs firm, or
information available through the CEOs alma maters alumni affairs departments.
3
Total sales is the net annual sales as reported by the company. ROA is return on assets,
calculated as the net income before extraordinary items and discontinued operations divided by
total assets. ROE is return on equity, calculated as the net income before extraordinary items and
discontinued operations divided by total common equity. Total sales, ROA, and ROE are
extracted from the EXECUCOMP database. Tobins q is calculated for each firm using the
Chung and Pruitt (1994) approximation, where all data is extracted from COMPUSTAT. The
liquidity ratio is calculated as cash and short-term investments divided by total assets. Leverage
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we extract CEO specific variables from the firm such as annual CEO compensation, the
percentage of the firms stock that is owned by the CEO (defined as OWNERSHIP), the CEOs
age, and tenure as CEO.
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III.B. The Out-of-Sample Period
Our study is constructed using an out-of-sample approach. As stated in Section III.A., all the
CEOs are chosen as of January 1, 2000. We then evaluate these CEOs over the out-of-sample
period 2000-2002. In this way, all CEOs who meet our criteria are included in the sample. We
use the data from 1997-1999 as in-sample data to help construct some of our performance
measures, and as lagged variables in some of our regressions.
The reason we use the out-of-sample approach is that it allows us to measure
performance over the relatively lengthy period of three years (2000-2002). If we were to instead
gather all CEOs each year and examine their annual performance, we would be limiting our
measure of performance to an unnecessarily small window of time that may not be long enough
to accurately measure a CEOs impact on the firm.
III.C. Survivorship Issues
Since most of the CEOs in our sample retained their position for the entire out-of-sample period,
and most firms survived the entire period, obtaining the data required to measure their out-of-
sample performance is a simple extraction from EXECUCOMP and CRSP. However, some
CEOs either retired or resigned during the out-of-sample evaluation period, and some firms
disappeared during this time. If we were to simply exclude these firms, it would create a
survivorship bias, as we would only be including those CEOs and firms that survived throughout
the entire out-of-sample period. To avoid this survivorship bias problem we proceed in the
following fashion. If we identify that the CEO retired or resigned during the out-of-sample
is calculated as the sum of total long-term debt and debt in current liabilities, divided by total
assets. The data used to calculate the liquidity ratio and leverage is from COMPUSTAT.
4
CEO compensation is total current compensation comprised of salary and bonus. The
percentage of firms stock that is owned by the CEO is the aggregate number of shares held by
the named executive officer, excluding stock options, divided by the number of common shares
outstanding as reported by the company. Age and tenure are as of January 2000. The data used to
calculate all of these measures is from EXECUCOMP.
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period, or that the firm disappeared, we identify the month and year of the resignation,
retirement, or disappearance. For those months in the out-of-sample period that precede the exit,
we extract data as we do for CEOs that retained their positions and firms that survived. For the
subsequent months, we replace the missing data with the average of all firms in our sample that
share the same two-digit SIC industry code as the given firm.
For example, consider an observation where the CEO had left the firm in July 2001. The
monthly returns that we use for the period up to and including June 2001 are the firms own
returns. The monthly returns from July 2001 through December 2002 are the average monthly
returns of the surviving firms that share the same industry classification. Similarly, the ROE of a
firm whose CEO left in July 2001 is the average ROE for each of the three years, where the 2000
ROE value is the value for the original firm itself. The 2001 ROE value is the weighted average
of the ROE of the original firm and the ROE associated with a portfolio of surviving firms with
identical industry classification as the observation, where weighting is based on the proportion of
months in 2001 during which the CEO remained CEO. The 2002 ROE value is the ROE
associated with the average firm with identical industry classification.
IV. Methodology
To examine performance, we use five different performance measures: out-of-sample simple
excess monthly returns, a modified version of the four-index alpha, Tobins q, return on assets
(ROA), and return on equity (ROE). Both the simple excess returns and the 4-index alpha are
market measures of performances while Tobins q, ROA, and ROE can be seen as operational
measures of performance.
IV.A. Out-of-Sample Simple Excess Returns
Simple excess returns are excess mean monthly returns less the one-month T-Bill rate during the
out-of-sample evaluation period (2000-2002), where monthly returns for each firm are extracted
from the CRSP database.
IV.B. A Modified 4-index Alpha
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Four-index alpha is a modified version of the Fama-French-Jagadeesh-Titman-Carhart four-
index alpha, which represents a risk-adjusted measure of performance.
5
To estimate the four-
index alpha, the following time-series regression model is used:
it t i t i t i t i i ft it
UMD HML B SMB RMRF R R + + + + + =
4 3 2 1
(1)
where
ft it
R R is the excess total return (net of the 30-day T-bill return) for firm i in the in-
sample Month t;
i
is the alpha for firm i;
t
RMRF is the value weighted market return on all
NYSE/AMEX/NASDAQ firms in excess of the risk-free rate;
t
SMB is the difference in returns
across small and big stock portfolios controlling for the same weighted average book-to-market
equity in the two portfolios;
t
HML is the difference in returns between high and low book-to-
market equity portfolios;
t
UMD is the momentum factor, the average return on two high prior
return portfolios minus the average return on two low prior portfolios, computed by Fama and
French.
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To actually estimate the four-index alphas we use a methodology similar to Elton, Gruber
and Blake (1996). Specifically, for each firm, we utilize a time series period of excess monthly
returns going back three years (1997 through 1999), and forward to the end of the out-of-sample
evaluation period (December 2002), to obtain an estimate of the intercept from equation (1). As
noted earlier, to be included in the sample, each firm requires three years of in-sample returns.
To obtain the alphas, we add the average monthly residual during the evaluation period to
the intercept. For example, we run equation (1) on firm returns starting in January 1997 and
ending in December 2002 (six years) to obtain an estimate of the intercept. We then add the
average of each firms residuals during the three years after the selection date (2000-2002) to the
estimated intercept (from the regression on 1997-2002) to obtain the firms modified four-index
alpha.
To obtain alphas for firms for which the observation disappears, either due to the CEOs
retirement or resignation, or due to the firms disappearance, we proceed as follows. First, we
run two regressions: (1) a regression using the firms returns beginning in January 1997 and
ending in the month prior to the observations disappearance; and (2) a regression run over the
5
See Fama and French (1993) Jagadeesh and Titman (1993) and Carhart (1997).
6
The data for the four-index alpha were obtained from Kenneth Frenchs webpage.
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entire regression period (1997-2002) using the returns of an equally weighted portfolio formed
each month from the surviving observations in the sample that share the same two-digit SIC. We
then form a weighted average of: (1) the firms estimated intercept plus the firms average
residual during the time it is non-missing in the evaluation period and (2) the estimated intercept
plus the average residual during the remaining time in the evaluation period of the equally
weighted portfolio, where the firms weight is the fraction of the evaluation period it survived
and the equally weighted portfolios weight is the remaining fraction. This provides a
performance measure for an investor who buys a random surviving same two-digit SIC firm if
the original firm changes CEO or otherwise disappears.
IV.C. Tobins q, ROE, ROA
Tobins q, ROA, and ROE, the extraction of which we described in Section III, are constructed
as the average annual value for the period 2000-2002. As stated in Section III, if a CEO retires or
resigns, or the firm disappears before the end of the out-of-sample period, we do not eliminate
the observation. Instead, the value for the observation is the weighted average of the value for the
original firm and for a portfolio of the firms in the sample that share the same two-digit as the
firm itself, where weighting is based on the proportion of each year before which the CEO
retired or resigned, or before which the firm disappeared.
V. Results
V.a. Summary Statistics
Summary statistics are presented in Table I. The table reports several noteworthy findings. The
mean composite SAT score of undergraduate institutions of the CEOs is approximately 1,219
(out of a possible 1600). Moreover, approximately 33.6 percent of firms have CEOs who hold
MBA degrees, and the mean GMAT score of these MBA programs is approximately 656.7 (out
of a possible 800). Approximately 12.2 percent of firms have CEOs who hold law degrees, and
the mean LSAT score of these law programs is approximately 161.8 (out of a possible 180).
Table I also reports that approximately 10.2 percent of firms have CEOs with graduate degrees
other than an MBA, and approximately 10.4 percent of the CEOs received their undergraduate
degrees from liberal arts institutions.
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To fully examine the effect of MBA and law degree quality on performance, we create
five dummy variables, GMAT1, GMAT2, GMAT3, LSAT1, and LSAT2 to rank-order the
quality of the MBA and law programs by their GMAT and LSAT scores, respectively.
Specifically, GMAT1, GMAT2, and GMAT3 are dummy variables that are equal to unity if the
CEO completed an MBA from a graduate school with mean GMAT scores 700 or greater,
between 600-699, and 599 or less, respectively.
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Similarly, LSAT1 and LSAT2 are dummy
variables that are equal to unity if the CEO completed a law degree from a graduate school with
mean LSAT scores equal to or greater than 165 and below 165, respectively. The reference
group is the group of firms with CEOs who do not hold graduate degrees.
Table I reports that approximately 15.4, 11.6, and 6.6 percent of firms in our entire
sample are run by CEOs holding MBAs from GMAT1, GMAT2, and GMAT3 schools,
respectively. Approximately 5.6 and 7.1 percent of the firms are run by CEOs holding law
degrees from LSAT1 and LSAT2 schools, respectively. Table I also provides summary statistics
for other CEO characteristics, measures of firm performance, and other firm characteristics that
we use in our tests.
V.b. CEO Performance and Education Characteristics
Tables II through V provide the results of tests of the relation between CEO education and
performance. In each of these four tables, we estimate CEO performance over the period 2000
through 2002 using excess simple (mean monthly) returns, the modified 4-index alpha, Tobins
q, ROE, and ROA. For each of these five measures of performance, we run two types of
regressions. First, using ordinary least squares (OLS) we run a regression using CEO education
variables, age, tenure, ownership, compensation, sales (as a proxy for size), and dummy
variables for the 2-digit SIC of the firm. The purpose of these regressions is to examine the effect
of CEO educational quality on firm performance while controlling for other issues. The age and
tenure variables are used to control for the presence of any age or tenure effects. Ownership is
used to control for the fact that some CEOs may have more control over the firm than others and
as a result may have more influence over performance. Compensation is used to control for the
7
For example, the business schools from which fund managers in our sample graduated from in
the GMAT1 group included Wharton, Columbia, Harvard, Stanford, NYU, MIT, Northwestern,
UCLA, Duke and UC-Berkeley.
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possibility that more highly compensated CEOs perform differently than less well compensated
CEOs. Sales is used to control for the size of the firm and dummy variables based on the 2-digit
SIC codes are used to control for any industry effects.
8
For the second regression, we run an instrumental variable (IV) regression where we use
the same variables as in the OLS regressions but also include out-of-sample leverage and the out-
of-sample liquidity ratio as endogenous variables. We include both of these variables as
endogenous variables as the CEO may be able to influence these variables. Lagged values of
leverage and liquidity, specified as the 1999 values of these measures, as used as instruments in
the regression.
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The results of CEO education on performance are organized as follows. Table II presents
the results of tests where the education variables include SAT (divided by 100), the liberal arts
dummy, and indicator variables equal to unity if the CEO completed an MBA, law degree, or
other graduate degree, respectively.
10
In Table III we replicate the same regressions as estimated
in Table II but replace the MBA and law degree indicator variables with the three GMAT and
two LSAT indicator variables, GMAT1-3 and LSAT1-2. In Table IV, we present results for the
sample of firms whose CEOs hold MBA degrees. Because all observations in this sample have a
GMAT score, we include the GMAT score as a regressor. Similarly, Table V displays the results
for the sample of firms whose CEO hold law degrees. Since all observations in this sample have
a LSAT score, we include the LSAT score as a regressor.
The performance regressions show three interesting findings. First, we find no evidence
that firms run by CEOs with from higher prestige undergraduate institutions perform any better
than firms lead by CEOs with educations from less prestigious undergraduate schools. All ten of
the SAT coefficients in Table II are negative and generally insignificant, indicating that
undergraduate educational prestige has little impact on firm performance. In the regressions
8
The results of these industry dummies are not reported. These results are available upon
request.
9
Note that we conducted the analysis presented in Tables II-V using lagged performance
measures to control for past performance of the firm. In all cases, that the inclusion of these
variables did not significantly impact our results.
10
The reference group for the MBA and Law dummies is firms with CEOs who do not hold
graduate degrees.
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where the dependent variable is the firms ROA, or the firms Tobins Q, we actually find that
the SAT score has a negative and significant relationship to firm performance, suggesting that
firms with CEOs from lower prestige undergraduate institutions actually perform better than
other firms. While these results for ROA and Tobins Q are confirmed in our sample of CEOs
that hold law degrees (Table V), they do not hold up when we examine a sample of CEOs that all
hold MBA degrees (Table IV).
Second, the results of Tables III, IV, and V illustrate that there is no evidence that firms
run by CEOs with from higher prestige graduate business or law schools perform any better than
firms lead by CEOs with educations from less prestigious graduate business or law schools.
Table III shows that the graduate quality dummy variables, GMAT1, GMAT2, GMAT3, and
LSAT1, LSAT2, are always insignificant across all the regressions, indicating that the
performance of CEOs has little do with the quality of the graduate program. Similarly, Tables IV
and V illustrate that the GMAT and LSAT variables are also insignificant when the tests are
conducted on samples of CEOs who all hold MBA or law degrees. Moreover, the point estimates
of these variables are often negative, indicating that if anything, there is a negative relationship
between educational prestige of the CEOs graduate school and firm performance.
Third, we find mixed results when examining the relationship between CEO educational
attainment and firm performance. We find that firms managed by CEOs with MBA or law
degrees perform no better than firms with CEOs without graduate degrees. As can be seen in
Table II, the dummy variables, MBA and LAW, are both insignificant. Hence, while much of the
management literature (as briefly described in Section II) suggests that CEOs with higher levels
of education attainment will have management styles and characteristics that may help the firm,
we do not find that greater CEO educational attainment (in terms of MBA and law degrees)
improves firm performance. On the other hand, we do find some limited evidence that firms led
by CEOs with graduate degrees in fields other than business and law, i.e., other graduate
degrees, do perform significantly better (at the 10 percent level) in terms of risk-adjusted
performance (the 4-index alpha). Assuming that these other graduate degree holding CEOs
have technical graduate degrees, this last result may be consistent with Barker and Muller (2002)
who find that firms with CEOs with technical degrees spend more on R&D and hence may have
better performance.
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V.c. CEO Compensation and Education Characteristics
While Tables II-V illustrate the results of educational quality on CEO performance, another issue
we wanted to examine was whether the quality of the education of the CEO influenced their
compensation. As mentioned in Section II, one of the findings of Palia (2000) was that CEOs in
non-regulated industries received greater compensation than CEOs in regulated industries. Since
Palia also found that CEOs of firms in non-regulated industries had had more prestigious
educations, his results suggest that CEOs with better educational backgrounds extract higher
compensation. To more directly examine this issue, we examine the relationship between CEO
educational quality and CEO compensation.
To estimate CEO compensation, we use the average annual compensation for each CEO
in our sample for the period 2000 through 2002. Using OLS only, we then examine the linkage
between educational quality and CEO compensation. As control variables we use age, tenure,
ownership, compensation, sales, and 2-digit SIC variables as independent variables, though the
results for 2-digit SIC are unreported. As well, we include a single performance measure in each
regression (simple mean monthly returns, the 4-index alpha, Tobinq, ROE or ROA) to control
for performance of the firm as the literature has shown that CEO compensation is related to firm
performance (see Jensen and Murphy (1990) for example).
In the first five regressions, columns 1 through 5 of Table VI, we limit the educational
variables to the ones we use in Table II: SAT, the liberal arts indicator variable, and indicator
variables that are equal to unity if the CEO completed an MBA, law degree, or other graduate
degree, respectively. In the subsequent five regressions, columns 6 through 10, we replace the
MBA and law degree indicator variables with the three GMAT and two LSAT indicator
variables, GMAT1-3 and LSAT1-2, respectively, similar to the refinement we presented in Table
III.
The results of Table VI indicate that the quality of CEO education is related to CEO
compensation. In regressions 1 through 5, we find a positive and significant (at the 10 percent
level) coefficient associated with the SAT variable, indicating that CEOs from higher prestige
undergraduate institutions receive significant more compensation than CEOs from lower prestige
undergraduate institutions. For the regressions in columns 6 through 10, we find a significantly
negative coefficient associated with the LSAT2 variable, significant throughout at the one
14
percent level. Hence, CEOs who graduated from low LSAT law schools have significantly
worse compensation.
VI. Conclusions
In this paper, we empirically relate the quality of CEO education to firm performance and CEO
compensation. We measure educational quality by examining the CEO educational attainment
and by measuring the prestige of the schools that the CEO graduated from by using mean
entrance exam scores. We find four results. First, we find no evidence that firms run by CEOs
from more prestigious schools (undergraduate or graduate) perform better than firms run by
CEOs from less prestigious schools. If anything, we find that the prestige of the CEOs school is
negatively related to firm performance as the point estimates of the coefficients are generally
negative. Indeed, in the cases where performance is measured by Tobins Q and ROA, the SAT
coefficients are actually negative and significant, indicating that there is a negative relationship
between the prestige of the CEOs undergraduate education and firm performance. Second, we
find that firms managed by CEOs with MBA or law degrees perform no better than firms with
CEOs without graduate degrees, suggesting that the impact of a graduate business or law degree
is minimal on CEO performance. Third, we find some limited evidence that firms run by CEOs
holding graduate degrees in other fields besides that of law or an MBA have slightly better risk-
adjusted market performance than other firms. Assuming that these other graduate degree
holding CEOs have technical graduate degrees, this last result is consistent with Barker and
Muller (2002) who find that firms with CEOs with technical degrees spend more on R&D and
hence may have better performance. Fourth, and finally, we find that that compensation is
somewhat higher for CEOs who attended high mean SAT undergraduate institutions and lower
for CEOs that attended low LSAT law schools.
What are some explanations for our results? First, consider our findings that the firm
performance is not impacted by the prestige or quantity of the CEOs undergraduate or graduate
education. There are several reasons why prestige may not matter. For example, even if mean
entrance test scores are a satisfactory measure of educational quality, the amount of time
between the CEOs completion of the degree(s) and the attainment of the position of CEO may
be sufficiently lengthy to diminish any benefit that can flow from a superior education. Indeed,
anyone who becomes a CEO of a NYSE firm likely has certain skills, developed over a lifetime,
15
which enabled them to achieve their position. Consequently, the quality of CEO education,
particularly education that was completed years earlier, may have little to do with CEOs current
performance. Furthermore, the lack of a relationship between CEO educational prestige and firm
performance may be due to the fact that CEOs with less prestigious educations work harder or
longer than CEOs with high prestige educational backgrounds. As a result, any positive effect of
prestige, i.e., better education, better social networks, etc., may be offset by a competing negative
relation that results from CEOs from weaker schools overcompensating through superior
performance. After all, completing a degree at a less prestigious school leaves a student at a
reputational and social capital disadvantage relative to the students competitors from better
schools. This disadvantage represents a barrier to career progression, beginning with the initial
job search and continuing as the individual pursues promotions. To overcome this disadvantage
and eventually achieve the position as CEO, the individual from a weaker school must
demonstrate superior performance capabilities, to compensate for this disadvantage. This
rationale can explain why we find only weak evidence of any relation between educational
quality and performance. Finally, our results showing that CEO educational prestige has little
impact on firm performance may be simply because mean entrance test scores represent a weak
proxy for prestige. As is well known, entrance into an educational institution is a function of
several factors besides entrance test scores. Further, while simply gaining entrance into a degree
program is an achievement, the acceptance alone does not provide full information regarding the
nature of the education and social capital that the student acquires.
Finally, consider the issue of compensation. Similar to Palia (2000), we do find some
evidence that attending more (less) prestigious undergraduate (law) schools implies higher (less)
compensation. These results suggest that even though performance may not be influenced by
education, the ability of a CEO to extract higher compensation is enhanced by a more prestigious
educational background. In a sense, companies are willing to pay more for a CEO with a
prestigious educational background even though our previous results suggest that this prestigious
educational background may not be worth the price.
What are the implications of our results? Assuming that we are measuring the quality of
education correctly, our results suggest, for the most part, that CEO educational quality is
unrelated to firm performance. We do find some limited evidence that CEOs holding graduate
degrees other than MBAs and law degrees perform better on a risk-adjusted basis; however,
16
these results are only weakly significant and do not hold up across all measures of firm
performance. Such results indicate that companies in their search for the right CEO should not
focus too much attention on the educational background of a CEO candidate if better firm
performance is the goal.
17
Appendix A: Further Description of Education Quality Variables.
SAT
We obtain up-to-date SAT scores for the undergraduate schools through initially searching
Collegeboard.com for the SAT I Verbal and SAT I Math test score ranges for the middle 50% of
first-year students.
11
The mean values of the verbal and math score ranges are calculated, and the
average of the verbal and math scores is calculated to identify a single SAT score for each
school. For all schools for which SAT scores were not identified on Collegeboard.com, we then
search the Princeton Guide to Colleges (2004) for mean SAT scores. For a select few schools,
while SAT scores are unavailable, ACT scores are reported. In these cases, the ACT scores are
converted into SAT scores using the SAT ACT score comparisons provided on
Collegeboard.com.
12
GMAT
We obtain GMAT scores for the MBA schools through initially searching MBA.com for the
mean GMAT score of new entrants.
13
For all schools for which GMAT scores are not identified
on MBA.com, we then search Businessweek.coms 2003 Full-Time MBA Profiles for the mean
GMAT scores. For all schools for which GMAT scores are not identified on either of the above
two sources, we search Petersons Guide to MBA Programs (2004) for the mean GMAT
scores.
14
11
Collegeboard.com is the website of the College Board, the organization that administers the
SAT tests, among other activities. The search was performed December 2003.
12
For a few of the CEOs, the undergraduate school reported is actually a system of schools. In
these cases, the SAT score identified is the average of the SAT scores for the schools within the
system for which SAT scores are reported on Collegeboard.com.
13
MBA.com is the website of the Graduate Management Admission Council, the organization
that administers the GMAT tests. The search was performed December 2003.
14
As for the SAT scores extraction, the graduate school reported is occasionally a system of
schools. In these cases, we proceeded in an identical fashion as described above for SAT scores.
18
LSAT
We obtain LSAT scores for the law schools through searching LSAT.org for test score ranges for
the middle 50% of first-year students.
15
The mean values of these ranges are calculated to
identify a single LSAT score for each law school.
Liberal Arts
Using USnews.coms 2004 list of liberal arts colleges we determine whether the CEOs
undergraduate institution is a liberal arts college or not. We choose this variable since many
educators argue that the individual attention given to students at liberal arts schools is superior to
that in larger, research-oriented institutions.
15
LSAT.com is the website of the Law School Admission Council, the organization that
administers the LSAT tests, among other activities. The search was performed December 2003.
19
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21
Table I: Summary Statistics
SAT is the mean composite SAT score of the CEOs undergraduate school. LIBERAL ARTS is a dummy
variable that is equal to unity if the CEO attended a liberal arts school. MBA is a dummy variable that is equal
to unity if the CEO completed an MBA degree. GMAT is the mean GMAT score of the CEOs MBA graduate
school. GMAT1-3 are dummy variables that are equal to unity if the CEO completed an MBA from a graduate
school with mean GMAT scores equal or greater than 700, between 600-699, and 599 or less, respectively.
LAW is a dummy variable that is equal to unity if the CEO completed a law degree. LSAT is the mean LSAT
score of the CEOs law school. LSAT1-2 are dummy variables that are equal to unity if the CEO completed a
law degree from a graduate school with mean LSAT scores equal to or greater than 165 and below 165,
respectively. OTHER SECOND DEGREE is a dummy variable that is equal to unity if the CEO completed a
graduate degree that is not identifiable as a law or MBA degree. AGE is the CEOs age. TENURE is the tenure
of the CEO at the firm. The remaining variables are calculated over the period 2000-2002. OWNERSHIP is the
average annual percentage of the firms stocks that the CEO holds. COMPENSATION is the average annual
total compensation of the CEO. SIMPLE EXCESS RETURNS are the mean monthly excess returns of the
CEOs firm. 4-INDEX ALPHA is the 4-index alpha of the CEOs firm. TOBINS Q is the average annual
Tobins q. ROE is the average annual return on equity for the CEOs firm. ROA is the average annual return
on assets for the CEOs firm. SALES is the average annual sales of the CEOs firm. LEVERAGE is the
average annual debt ratio of the CEOs firm. LIQUIDITY RATIO is the average annual liquidity ratio of the
CEOs firm.
Name Number Mean STD
CEO Education Variables:
SAT/100 482 12.191 1.475
MBA 482 0.336 0.473
GMAT/100 162 6.567 0.655
GMAT1 (700 and above)
482 0.154 0.361
GMAT2 (600-699)
482 0.116 0.321
GMAT3 (599-below)
482 0.066 0.249
LAW 482 0.122 0.328
LSAT/100 59 1.618 0.066
LSAT1 (165 and above) 482 0.056 0.23
LSAT2 (164 and below) 482 0.071 0.256
LIBERAL ARTS 482 0.104 0.305
OTHER GRAD DEGREE 482 0.102 0.303
Other CEO Characteristics:
AGE/10 482 5.628 0.899
TENURE 482 6.743 6.359
OWNERSHIP 482 0.021 0.048
COMPENSATION/1,000 482 1,657.711 1,465.701
Firm Performance:
SIMPLE EXCESS RETURNS 482 0.007 0.016
4-INDEX ALPHA 482 0.008 0.016
TOBINS Q 469 1.689 1.278
ROE 481 11.004 33.161
ROA 482 4.014 5.308
Other Firm Characteristics:
LOG SALES/1,000,000 482 6,151.228 13,255.43
LEVERAGE 482 0.282 0.167
LIQUIDITY RATIO 482 0.084 0.114
22
Table II: Performance Regressions Using MBA and LAW Dummy Variables.
We examine the relation between firm performance and CEO education using MBA and LAW Dummy variables. Each regression is estimated using
both Ordinary Least Squares (OLS) and Instrumental Variables (IV) methodologies. For the IV regressions liquidity and leverage are treated as
endogenous variables where the instruments of the regression are lagged liquidity and lagged leverage. These regressions include dummy variables
for 2-digit SIC codes. The results for the industry dummies are not reported. ***, **, * indicate significance at the one, five, and ten percent levels,
respectively.
Dependent Variable is the Performance Measure
Independent Variables:
SIMPLE
/ OLS
4-INDEX
/ OLS
TOBINS Q
/OLS
ROE
/OLS
ROA
/OLS
SIMPLE
/IV
4-INDEX
/IV
TOBINS Q
/IV
ROE
/IV
ROA
/IV
Intercept 0.0836*** 0.0517*** 1.6972* -21.9061 6.1955 0.0867*** 0.0387** 1.3828 -20.3493 5.4222
SAT/100 -0.0004 -0.0006 -0.0608** -0.3786 -0.3697** -0.0004 -0.0005 -0.0560** -0.4026 -0.3556**
LIBERAL ARTS -0.0003 -0.0007 -0.0101 -6.3077 -0.9294 0.0002 -0.0005 -0.0295 -6.1707 -1.0233
MBA -0.0005 0.0000 -0.0687 1.7144 0.0255 0.0001 0.0003 -0.0916 1.8727 -0.0848
LAW -0.0008 -0.0014 0.0864 -2.6925 -0.4367 -0.0013 -0.0023 0.0895 -2.8096 -0.3470
OTHER GRAD DEGREE -0.0004 0.0053* 0.1028 -4.4459 -0.0287 0.0003 0.0032 0.0451 -4.1326 -0.1990
AGE/10 -0.0007 -0.0013 -0.0431 1.8695 0.0072 -0.0012 -0.0011 -0.0186 1.7140 0.1045
TENURE 0.0001 0.0001 0.0057 -0.4554 -0.0667 0.0001 0.0001 0.0064 -0.4605 -0.0634
OWNERSHIP 0.0120 0.0210 1.7590 13.2730 17.6360*** 0.0278 0.0046 0.9137 18.6500 14.4411**
log(COMPENSATION) 0.0006 0.0014 0.0911 1.6374 0.9027*** 0.0009 0.0007 0.0692 1.7645 0.8349***
LOG SALES -0.0037*** -0.0026*** -0.0488 0.1430 -0.5258** -0.0043*** -0.0017** -0.0122 -0.0758 -0.3994*
LEVERAGE 0.0261*** 0.0013 -1.0967*** 7.4691 -4.8787**
LIQUIDITY RATIO 0.0003 0.0384*** 0.4348 -1.8489 0.5074
# OBS. 482 482 469 481 482 482 482 469 481 482
Adj-R2 0.213 0.109 0.567 0.090 0.195 0.191 0.188 0.597 0.083 0.227
23
Table III: Performance Regressions using GMAT1-3 and LSAT1-2 Dummy Variables.
The table examines the relation between firm performance and CEO education using GMAT1-3 and LSAT1-2 dummy variables. Each regression is
estimated using both Ordinary Least Squares (OLS) and Instrumental Variables (IV) methodologies. For the IV regressions liquidity and leverage are
treated as endogenous variables where the instruments of the regression are lagged liquidity and lagged leverage. These regressions include dummy
variables for 2-digit SIC codes. The results for the industry dummies are not reported. ***, **, * indicate significance at the one, five, and ten percent
levels, respectively.
Dependent Variable is the Performance Measure
Independent Variables:
SIMPLE
/ OLS
4-INDEX
/ OLS
TOBINS Q
/OLS
ROE
/OLS
ROA
/OLS
SIMPLE
/IV
4-INDEX
/IV
TOBINS Q
/IV
ROE
/IV
ROA
/IV
Intercept 0.0819*** 0.0523*** 1.8357** -22.2806 7.0863 0.0858*** 0.039** 1.4998* -19.8392 6.2943
SAT/100 -0.0002 -0.0006 -0.0712** -0.2899 -0.4398*** -0.0003 -0.0005 -0.0642** -0.3319 -0.4163**
LIBERAL ARTS -0.0001 -0.0007 -0.0179 -5.6812 -0.9312 0.0004 -0.0005 -0.0369 -5.5641 -1.0238
GMAT1 -0.0023 0.0004 0.0231 -1.7083 0.3986 -0.0013 0.0007 -0.0129 -1.4809 0.2260
GMAT2 0.0020 0.0022 -0.0619 5.9684 0.0106 0.0028 0.0020 -0.0970 6.1938 -0.1303
GMAT3 -0.0010 -0.0042 -0.2706 2.1800 -0.6924 -0.0013 -0.0030 -0.2432 1.9535 -0.6193
LSAT1 -0.0028 -0.0024 0.1823 3.1226 1.0976 -0.0024 -0.0036 0.1511 3.3445 1.0210
LSAT2 0.0006 -0.0002 0.0148 -6.5478 -1.4873 -0.0005 -0.0007 0.0438 -6.8112 -1.2815
OTHER GRAD DEGREE -0.0003 0.0054** 0.1041 -3.9454 0.0070 0.0005 0.0034 0.0471 -3.5213 -0.1495
AGE/10 -0.0007 -0.0014 -0.0547 1.6567 -0.0672 -0.0012 -0.0012 -0.0276 1.4748 0.0386
TENURE 0.0001 0.0001 0.0059 -0.4858* -0.0679 0.0000 0.0001 0.0066 -0.4914* -0.0647
OWNERSHIP 0.0147 0.0226 1.6954 13.6495 16.8655*** 0.0301 0.0064 0.8864 19.5317 13.9483**
log(COMPENSATION) 0.0008 0.0015 0.0843 1.3670 0.8148** 0.0010 0.0008 0.0653 1.5089 0.7636**
LOG SALES -0.0038*** -0.0026*** -0.0415 0.3239 -0.4490** -0.0044*** -0.0018** -0.0080 0.0883 -0.3417
LEVERAGE 0.0257*** 0.0013 -1.0701*** 6.9153 -4.7409**
LIQUIDITY RATIO -0.0002 0.0379*** 0.4140 -3.9636 0.2296
# OBS. 482 482 469 481 482 482 482 469 481 482
Adj-R2 0.213 0.110 0.567 0.089 0.197 0.191 0.187 0.595 0.083 0.227
24
Table IV: Performance Regressions MBA Only.
The table examines the relation between firm performance and CEO education using a sample of CEOs that hold MBA degrees. GMAT is the mean
GMAT score of the CEOs MBA graduate school. Each regression is estimated using both Ordinary Least Squares (OLS) and Instrumental Variables
(IV) methodologies. For the IV regressions liquidity and leverage are treated as endogenous variables where the instruments of the regression are
lagged liquidity and lagged leverage. These regressions include dummy variables for 2-digit SIC codes. The results for the industry dummies are not
reported. ***, **, * indicate significance at the one, five, and ten percent levels, respectively.
Dependent Variable is the Performance Measure
Independent Variables:
SIMPLE
/ OLS
4-INDEX
/ OLS
TOBINS Q
/OLS
ROE
/OLS
ROA
/OLS
SIMPLE
/IV
4-INDEX
/IV
TOBINS Q
/IV
ROE
/IV
ROA
/IV
Intercept 0.0332 -0.0476 -3.3455 1.2000 -13.3084 0.0290 -0.0543 -3.6237 -9.0078 -13.4908
SAT/100 0.0006 0.0001 -0.0026 0.0955 0.3071 0.0003 0.0009 0.0420 -0.5553 0.4065
LIBERAL ARTS 0.0005 -0.0002 -0.0115 -18.5834* -0.5917 0.0006 0.0009 0.0241 -18.3992* -0.4926
GMAT -0.0012 0.0028 0.1454 -0.9666 0.1946 -0.0003 0.0016 0.0232 1.2285 -0.0183
AGE/10 -0.0014 -0.0005 -0.0418 1.2644 -0.3666 -0.0019 -0.0007 -0.0300 0.1488 -0.3321
TENURE 0.0007** 0.0005 -0.0039 -0.2446 -0.0096 0.0005* 0.0005 0.0009 -0.6655 0.0077
OWNERSHIP -0.0549 -0.0831 -1.6855 -77.6869 -23.1318 -0.0063 -0.1032 -4.4209 39.3825 -30.0078
log(COMPENSATION) 0.0075* 0.0071* 0.2934 4.4319 2.6889** 0.0075* 0.0065* 0.2978 4.5856 2.6221**
LOG SALES -0.0058*** -0.0031* -0.0191 -2.3916 -1.1079** -0.0062*** -0.0028* -0.0049 -3.2684 -1.0409**
LEVERAGE 0.0350** 0.0107 -0.4295 83.8844* -2.5893
LIQUIDITY RATIO 0.0000 0.0681** 2.8801* -1.2892 6.4131
# OBS. 161 161 137 161 161 161 161 137 161 161
Adj-R2 0.306 0.160 0.334 0.066 0.116 0.280 0.283 0.390 0.046 0.121
25
Table V: Performance Regressions LAW Only.
The table examines the relation between firm performance and CEO education using a sample of CEOs that hold law degrees. LSAT is the mean
LSAT score of the CEOs law school. Each regression is estimated using both Ordinary Least Squares (OLS) and Instrumental Variables (IV)
methodologies. For the IV regressions liquidity and leverage are treated as endogenous variables where the instruments of the regression are lagged
liquidity and lagged leverage. These regressions include dummy variables for 2-digit SIC codes. The results for the industry dummies are not
reported. ***, **, * indicate significance at the one, five, and ten percent levels, respectively.
Dependent Variable is the Performance Measure
Independent Variables:
SIMPLE
/ OLS
4-INDEX
/ OLS
TOBINS Q
/OLS
ROE
/OLS
ROA
/OLS
SIMPLE
/IV
4-INDEX
/IV
TOBINS Q
/IV
ROE
/IV
ROA
/IV
Intercept 0.0060 0.0351 -3.3195 -14.268 -62.8724* 0.0552 0.1063 -2.4345 -100.0169 -77.8987*
SAT/100 -0.0031* -0.0028 -0.0828 -2.6146* -1.8895*** -0.0030 -0.0024 -0.0724 -2.8318* -1.8869***
LIBERAL ARTS -0.0033 0.0022 -0.5057 -5.2366 -3.9767 -0.0027 0.0020 -0.5325 -6.3373 -4.4850*
LSAT 0.0335 0.0353 2.6415 41.0710 45.8591** 0.0152 -0.0004 2.0252 73.083* 48.857**
AGE/10 0.0002 -0.0013 0.9317*** 0.8302 1.0177 -0.0015 -0.0049 0.8204** 3.7407 1.1795
TENURE -0.0013** -0.0003 -0.0472 -0.0785 -0.2002 -0.0010 0.0005 -0.0230 -0.6727 -0.2204
OWNERSHIP 0.0818 -0.0390 -11.3356** -45.2724 2.1275 0.0957 -0.0188 -10.9711** -69.4206 -2.0598
log(COMPENSATION) 0.0003 -0.0018 -0.1517* -0.5156 0.0613 0.0006 -0.0015 -0.148* -1.0455 -0.0518
LOG SALES -0.0024 -0.0011 0.0491 0.0040 0.5079 -0.0031 -0.0021 0.0264 1.1818 0.6893
LEVERAGE -0.0354 -0.0659 -1.7869 61.9972* 6.7179
LIQUIDITY RATIO -0.0133 0.0088 0.9513 22.7224 11.9729
# OBS. 59 59 49 59 59 59 59 49 59 59
Adj-R2 0.385 0.304 0.725 0.898 0.553 0.339 0.297 0.711 0.908 0.566
26
Table VI: Compensation Regressions
The table examines the relation between CEO compensation and CEO education. Each regression is estimated using Ordinary Least Squares (OLS).
The dependent variable is log (average annual CEO compensation over the period 2000-2002). Regressions 1-5 use MBA and LAW dummies.
Regressions 6-10 use GMAT1-3 and LSAT1-2 dummies. To control for performance, regressions 1 and 6 use the mean monthly excess returns of the
CEOs firm over the period 2000-2002; regressions 2 and 7 use the 4-index alpha; regressions 3 and 8 use Tobins q; regressions 4 and 9 use ROE;
regressions 5 and 10 use ROA. These regressions include dummy variables for 2-digit SIC codes. The results for the industry dummies are not
reported. ***, **, * indicate significance at the one, five, and ten percent levels, respectively.
Dependent Variable is log(COMPENSATION)
Independent Variables: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
Intercept 6.2858*** 6.233*** 6.2608*** 6.3999*** 6.1755*** 6.2771*** 6.2398*** 6.3076*** 6.4179*** 6.215***
SAT/100 0.0406 0.0417* 0.0454* 0.0417* 0.0472* 0.0273 0.0289 0.0326 0.0288 0.0350
LIBERAL ARTS 0.0485 0.0502 0.0490 0.0554 0.0670 0.0514 0.0534 0.0534 0.0574 0.0685
MBA -0.0399 -0.0407 -0.0332 -0.0363 -0.0406
LAW -0.1794 -0.1754 -0.1867 -0.1706 -0.1680
GMAT1 0.0029 -0.0031 -0.002 0.0031 -0.0094
GMAT2 -0.0614 -0.0647 -0.0542 -0.0544 -0.0567
GMAT3 -0.0589 -0.0462 -0.0451 -0.0544 -0.0467
LSAT1 0.2205 0.2224 0.1898 0.2182 0.1907
LSAT2 -0.4175*** -0.414*** -0.4320*** -0.4036*** -0.3818***
OTHER GRAD DEGREE 0.0142 -0.0038 0.0077 0.0279 0.0139 0.0275 0.0083 0.0184 0.0401 0.0264
Age/10 -0.0211 -0.0181 -0.0215 -0.0238 -0.0220 -0.0326 -0.0290 -0.0329 -0.0350 -0.0322
TENURE 0.0256*** 0.0252*** 0.0253*** 0.0259*** 0.0267*** 0.0245*** 0.0241*** 0.0242*** 0.0248*** 0.0256***
OWNERSHIP -5.9679*** -5.9948*** -6.0461*** -5.9394*** -6.2168*** -6.0433*** -6.0692*** -6.0944*** -6.008*** -6.2529***
LOG SALES 0.3214*** 0.3224*** 0.3171*** 0.3152*** 0.3207*** 0.3326*** 0.3325*** 0.3259*** 0.3251*** 0.3289***
SIMPLE 1.6780 2.0190
4-INDEX 3.2799 3.4274
TOBINS Q 0.0724 0.0661
ROE 0.0009 0.0007
ROA 0.0214*** 0.0192**
# OBS. 482 482 469 481 482 482 482 469 481 482
Adj-R2 0.336 0.338 0.306 0.339 0.348 0.345 0.347 0.315 0.347 0.354