PhD CEOs and firm performance

• Published date: 01 March 2022
• Author: Andrew Urquhart,Hanxiong Zhang
• Date: 01 March 2022
• DOI: http://doi.org/10.1111/eufm.12316

Eur Financ Manag. 2022;28:433–481. wileyonlinelibrary.com/journal/eufm

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DOI: 10.1111/eufm.12316

ORIGINAL ARTICLE

PhD CEOs and firm performance

Andrew Urquhart

1

|Hanxiong Zhang

2

1

ICMA Centre, Henley Business School,

University of Reading, Reading, UK

2

Surrey Business School, University of

Surrey, Guilford, Surrey, UK

Correspondence

Andrew Urquhart, ICMA Centre, Henley

Business School, University of Reading,

Reading RG6 6UR, UK.

Email: a.j.urquhart@icmacentre.ac.uk

Abstract

This paper investigates the relationship between the

education of a Chief Executive Officer (CEO) and firm

performance and provides robust evidence that firms

led by CEOs with PhDs outperform their peers. We

find that CEOs with PhDs increase firm performance

by 3.03% while CEOs with a PhD from a highly ranked

university increase firm performance by 4.65%. Our

results are robust to endogenous CEO selection, tran-

sition firms, alternative rankings, unobserved firm

characteristics and the network of the CEO. We also

show that the increase in firm performance is due to a

tighter control of costs and superior cash flow

management.

KEYWORDS

CEO characteristics, education, firm performance, PhD

JEL CLASSIFICATION

G00, G03

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This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and

reproduction in any medium, provided the original work is properly cited.

© 2021 The Authors. European Financial Management published by John Wiley & Sons Ltd.

We would like to thank John Doukas (editor) and two anonymous referees for their invaluable

comments. We would also like to thank Nikolaos Antypas, Don Bredin, Chris Brooks, Michael

Clements, Thomas Conlon, John Cotter, Andreas Hoepner, Ronan Powell, Ivan Sangiorgi and

Lisa Schopohl for helpful suggestions as well as the comments received by conference parti-

cipants at the Financial Management Association European Conference 2019, the INFINITI

Conference on International Finance 2019, the British Accounting and Finance Conference

2019, as well as seminar participants at the ICMA Centre at Henley Business School, Smurfit

Business School at University College Dublin and Politecnico di Milano. All remaining errors

are our own.

1|INTRODUCTION

The corporate governance literature is abound with studies examining the personal char-

acteristics of Chief Executive Officers (CEOs) and which of them drive the decision making of

the CEO and influence firm performance. The idea that the experience, demographic and

psychological characteristics of managers' shape their cognitive and values and thus their

strategic decision making comes from upper echelons research by Hambrick and Mason (1984).

One life experience that has received limited attention in the literature is the education of a

CEO. We add to this literature and provide a thorough investigation on the relationship be-

tween the CEO education and firm performance and find that CEOs with a PhD increase firm

performance by 3.03% while CEOs with a PhD from a highly ranked institution increase firm

performance by 4.65%.

The higher education received by a CEO is an important determining factor on the per-

sonality and skills of an individual as this may be the last formal education they receive before

they enter the work place. Chevalier and Ellison (1999) document a positive relationship

between managers' education and mutual fund performance, where managers with under-

graduate degrees from Ivy League universities generate higher risk‐adjusted returns. However

they also show that managers with Ivy League MBA degrees achieve higher returns also

entirely by shifting towards greater systematic risk. Bhagat et al. (2010) show that education is a

very important factor in the hiring process of CEOs, however they show no significant re-

lationship with their education and long‐term firm performance. Recently, King et al. (2016)

examine bank performance and show that CEOs with MBAs outperform their peers by arguing

that management education delivers the skills required to manage large banks and achieve

successful performance.

Education has two broad dimensions, namely the level of education attained, and the

quality of the education received. There are four main levels of education an individual can

receive at university, namely an Undergraduate (UG) degree, a Postgraduate (PG) degree, a

Masters of Business Administration (MBA) degree as well as a Doctor of Philosophy (PhD)

degree. These differing levels of degrees have different focuses and qualities, and therefore will

impart different skills and knowledge onto the individual. Higher levels of CEO education have

been linked to superior levels of cognitive complexity (Wally & Baum, 1994), more innovation

(Wiersema & Bantel, 1992), more sustained investment in a firm (Bertrand & Schoar, 2003),

and a facility to make valuable alliances (Palmer & Barber, 2001). All of these outcomes may

lead to sustainable superior firm performance. The second dimension of an education is the

quality of the education received. Universities accept students based on their grades from

school or college and therefore higher ranked universities will only accept students with ex-

cellent grades. We would expect that at higher ranked universities students will be more

capable and therefore will be exposed to more challenging and a more advanced level of

content than students who go to lower ranked universities which accept students with lower

grades. It stands to reason therefore, that admission to a highly ranked university may signal a

human resource that is particularly likely to promote superior sustained performance, as those

selected are, in effect, winners of a tournament of talent (Lazear & Rosen, 1981). Also, selection

by a top university may indicate a variety of talents as Rogers (2010) finds that education is

associated with more creativity and innovation, and greater receptiveness to new ideas.

Nevertheless, there are two competing channels in which education can influence the

performance of a CEO. The first channel is that more capable individuals do well at school and

therefore attend a high‐quality institution where they go on to study a PhD. In this respect, the

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education received had little effect on the individual but the level and quality of education is a

signal of the cognitive ability of the individual. The alternative channel is that individuals gain

skills and knowledge during their studies that increase their decision‐making ability, and this is

very important for individuals who complete a PhD. As noted by He and Hirshleifer (2021),

studying for a PhD shows a commitment to invest in costly human capital and requires con-

siderable patience, problem solving and an explanatory mindset. Therefore by pursing and

completing a PhD, individuals will gain certain skills that they would have otherwise not

gained by only studying for an undergraduate or postgraduate taught programme. However we

do accept that it is impossible in our current study to disentangle these two channels as we lack

data on the cognitive ability of CEOs before their education and after they finish their studies.

We construct a data set that captures CEO educational qualifications for FTSE 350 firms for

the period 1999–2017. We collect data on the types of degrees held by all CEOs and also identify

whether the awarding institution is among the top 100 ranked universities in the world,

according to the highly respected QS‐ranking system. This is very important since the quality of

the university attended is a signal to the cognitive ability of the CEO, and therefore the quality

of education they receive at university. Therefore students graduating from highly ranked

institutions should have a higher cognitive ability and have been subjected to a quality level of

education than students that go to lower ranked institutions. Our paper offers several important

contributions to the existing literature. We extend and complement the existing literature by

examining the link between CEO characteristics and firm performance. Previous studies have

mainly focused on the banking industry or a small sample size, while we study all types of firms

listed on the FTSE 350, including banks. We find that CEOs with undergraduate, postgraduate

or MBA level education offer little explanatory power when explaining firm performance. We

do find however that CEOs with PhDs exhibit significantly higher firm performance compared

with their peers without a PhD education. This suggests that CEOs who conduct a lengthy

research‐based degree acquire skills and knowledge that enables them to perform better as a

CEO compared with their peers.

We capture the level and quality of CEO education by employing factor analysis, which has

been very popular since the seminal work by Tetlock (2007). Using factor analysis allows us to

extract the key factors in the CEO education index and this method is preferred since it avoids

the issue of including a large number of inter‐correlated variables, subjectively choosing edu-

cation variables and it also enables the inclusion of broader dimensions than other methods

allow. Through this factor analysis, we find that the combination of the level and quality of PhD

education is the largest factor, followed by the combination of the level and quality of a PG

education and then the combination of the level and quality of a MBA education.

We probe the validity of our results through propensity score matching based difference‐in‐

difference since it could be that only large and wealthier firms are able to attract CEOs with

excellent education credentials. Nevertheless, our results are robust and show the added value

of a CEO with a PhD from a highly ranked institution. We also find that CEOs with a PhD

increase firm performance by controlling costs and superior cash flow management. Finally we

show that our results are robust to alternative quality ratings, alternative university rankings,

CEO networks and to the exclusion of financial and utility firms.

Our paper also adds to the literature of CEO cognitive ability. Recently, Adams et al. (2018)

show that the median large‐company CEO belongs to the top 17% of the population in cognitive

ability. While we cannot explicitly capture the cognitive ability of our CEOs, it is reasonable to

assume that CEOs who attend highly ranked institutions performed well at school and

therefore are towards the top of the population based on cognitive ability. We find that CEOs

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