Attention Shareholders: Get Your CEO in Shape!
CEO Fitness and Firm Value
- Limbach and Sonnenburg
- A version of the paper can be found here.
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We provide evidence for a positive impact of CEO fitness on firm value (Tobin’s Q). For each of the years 2001 to 2011, we define S&P 1500 CEOs as fit if they finish a marathon. Fit CEOs are associated with higher firm profitability and M&A announcement returns. Effects on firm value are strongest for CEOs with above-median age, above-median tenure and high workload, consistent with the positive impact of fitness on cognitive functions, performance and stress coping found in the literature. Results are robust to tests for endogeneity, including CEO-firm fixed effects, time-varying firm and industry effects, reverse causality, permutation tests, and sudden deaths. They provide an explanation for the growing importance of fitness in the managerial labor market.
There is a growing body of literature about how CEOs’ physiology can affect their compensation and firm performance. Examples include facial attractiveness, a competent look, and so on (Graham, Harvey, and Puri, 2014, Halford and Hsu, 2013). In this paper, the authors illustrate another important physical aspect that may affect firm value: A CEOs’ level of fitness. The authors define CEOs as being “fit” if they finish a marathon, which is a good proxy for fitness. Firm value is measured by Tobin’s Q. The authors identify the following empirical facts:
- Around 6% of all CEOs are “fit.” The fraction of CEOs with at least one finished marathons has almost doubled between 2001 and 2011.
- From the panel regression of 9,500 firm-year observations from 2001 to 2011, the paper find that CEOs who finish a marathon in a given year are associated with a significantly higher firm value (Tobin’s Q) and higher M&A abnormal returns.
- Firm value is almost 5% higher on average for firms managed by a fit CEO, after controlling for other factors (firm and governance characteristics, past performance and firm fixed effects).
- Fit CEOs also perform better on large corporate investments, like mergers and acquisitions (M&As).
- Fitness is even more important for older managers.
The regression estimates formally tests the relationship between firm value and the “Fit CEO” variable. The empirical results support this paper’s conclusions.
We are doing our piece to get in shape. Here is the Alpha Architect team finishing up the Mighty Hamptons Olympic Triathalon last weekend.
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Definitions of common statistics used in our analysis are available here (towards the bottom)