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Hye Seung (Grace) Lee, Ph.D.: When Companies Lose CEOs

Faculty | Aug 05, 2021 |

By Chelsee Pengal

How does the sudden death of a company’s CEO affect its shareholder value? What does the answer mean for aspiring leaders?

Hye Seung (Grace) Lee, Ph.D., assistant professor in the accounting and taxation area at the Gabelli School, recently used data capturing the sudden death of CEOs at 164 companies between 1980 and 2012 to look at the impact CEOs with a particular skill set have on a company’s value. Because research shows CEOs who have developed more generalized skills are paid more than their counterparts focusing on one area, Lee wanted to see if shareholders place a higher value on organizations that hire this type of leader.

In the past, executives could work their way up in one company by specializing in accounting, for instance. Now, however, given technological developments, including the internet, “companies are more complex, and they deal with a lot of different areas,” Lee said. “If you only know one thing, it doesn’t really apply to other areas.”

Business students are noticing the change too. “A lot of accounting students want to get into accounting firms in the consulting area,” Lee noted, “because you can learn different areas.” Volunteering for opportunities that give exposure to multiple divisions is becoming more popular.

Lee’s research illustrates this shift as well. The increasing demand for generalists with broad managerial work experience does affect firm value.

Lee and her coauthors described their investigation in a recent paper in the Journal of Financial and Quantitative Analysis. Using a method established in prior research, they first computed the “general ability” (GA) of each CEO based on the number of different positions they held at different companies in different industries. The researchers used a unique sample of sudden deaths to isolate the effect of the CEO’s characteristics on firm value. Ordinary CEO turnover often follows poor performance. The stock market reaction to CEO turnover announcements is therefore often contaminated by the condition of the firm at the time of the turnover.

Lee found that the higher the GA of the exiting CEO, both on its own and relative to the successor’s GA, the more negative the stock returns after the death announcement. Similarly, stock returns were positive after announcements of a successor with more generalist abilities.

To control for the limited examples of CEO sudden deaths, Lee also incorporated CEO turnovers that were non-sudden but still unrelated to firm conditions into her research. The findings were the same: Corporate shareholders consider generalist CEOs to be beneficial, which is reflected in firms’ value.

Based on this research, Lee said, “I think firms should consider generalist [skills] as a factor if they have to hire a CEO.”

There is clearly a need for it, she pointed out, but “there is not enough supply yet of these generalist skills, so that means firms need to plan well ahead to incorporate them.”

Business students and early-career professionals embracing broader opportunities have the right idea. “The idea that you can work yourself up within a firm to become CEO is no longer the rule,” said Lee.

To become a top executive, she noted, you need to show you can adapt. In an unpredictable world, developing transferable, generalist skills will get you noticed—and could help you get to the top.

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