For firm valuation, more news (good and bad) about CEOs is good news.
Dr Bang Dang Nguyen
More news about a company’s chief executive – positive and not – is good news when it comes to the firm’s valuation, according to a study at University of Cambridge Judge Business School.
More media coverage of a CEO is a “channel of investor recognition” that also helps the chief executive extract higher compensation, says the study published in the Quarterly Journal of Finance.
“The study shows that, in the long term, if a firm’s CEO attracts more media coverage the firm will do better in terms of valuation,” says Bang Dang Nguyen, University Lecturer in Finance and Director of the MPhil in Finance Programme at Cambridge Judge.
We live in a world of incomplete information, and the study shows that additional coverage of a company’s CEO helps fill that information gap for investors, and this contributes to additional valuation.
The issue of CEO press exposure – whether and how much – is one regularly debated by company strategists. So the study provides a key insight: despite the risk of negative news coverage now and again, it is advantageous to firm valuation for a CEO to be visible rather than avoid the news media – because more aggregate CEO news coverage helps in boosting investor and public confidence.
The study deliberately focused on coverage of CEOs rather than their companies, because often a CEO is better known than his or her company, and investors tend to listen to the CEO seriously; in fact, in many cases the CEO becomes not only the company’s public face but also its embodiment in the eyes of investors and the broader public.
The study found that companies with the highest level of CEO media coverage outperformed in value those with the lowest level by eight per cent, while firms with the highest level of positive CEO coverage outperformed those with the lowest level by seven per cent – suggesting it was the greater aggregate CEO coverage itself, not its relative positivity, that was the key factor to greater value.
The study – entitled “Is more news good news? Media coverage of CEOs, firm value, and rent extraction” – computes firm value by Tobin’s q, a measurement that divides market value of assets by the replacement cost of assets.
The study also finds that greater news coverage helps a CEO in terms of “rent extraction” – increased total compensation – that is 4.1 per cent “above and beyond what they obtain from the increase in firm value that arises due to media coverage.” That “extraction” typically comes in the form of equity-based incentive compensation such as a new grant of common stock and options, and not cash.
Previous studies have mostly focused on the effect of media coverage on specific events or announcements by firms, while Nguyen’s research uses a long-term approach based on aggregate coverage of CEOs, including both good and bad news.
The study focuses on Fortune 500 CEOs, who are by definition relatively well known among investors, and covers a 10-year period beginning in 1992, when detailed data on CEOs became available through the Execucomp database of top executives’ salary, bonus and stock options. Nguyen said the framework of the paper allows an extension of the data period into the 2010s, and he believes that the result will be consistent.
The study looks at major world publications in assessing volume of news coverage, and uses keywords to look for articles that are positive in nature; it also has controls for short CEO tenures and news coverage linked to advertising. The average CEO in the sample was mentioned in 57 news stories a year (13 of them positive).
“Because of incomplete information, investors rely at least partially on public information to make decisions,” the study says. “Media coverage may help in removing some uncertainty, bringing in more transparency, adding credibility, and highlighting the viability of future projects.”
The research on CEO news coverage is one of several studies by Nguyen related to executive pay and corporate governance. A study published last year in Management Science Journal – which looked at the sudden death of executives – found that 42 per cent of CEOs are overpaid while 58 per cent are not, and that on average a CEO takes home 65 cents of every dollar they create for shareholders.