March 3rd, 2019
(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at: email@example.com
We found no statistically significant alphas — despite testing every possible school with a reasonable sample size. MBA programs simply do not produce CEOs who are better at running companies, if performance is measured by stock price return.
We ran similar regressions controlling for industry and found that — even after controlling for industry — elite MBAs did not produce positive statistically significant alpha. Elite MBAs did perform relatively well as CEOs in healthcare and consumer staples, but relatively poorly in energy and materials businesses, though those results were not statistically significant. Our study is not the only one to come to this conclusion. A study by economists at the University of Hawaii asked similar questions and found that firm performance is not predicted by the educational background of the CEOs.
The perceived quality of each institution appeared to have no correlation with stock price returns. Northwestern led with an alpha of 0.58 percent per month. Stanford eked out a barely positive alpha of 0.03 percent per month. Harvard and Wharton had negative alphas of -0.15 percent and -0.19 percent, respectively, per month. While these rankings likely occurred by sheer chance, they do nothing to support Jensen’s thesis.
Lastly, we looked at how CEOs who had previously worked at investment banks and elite consulting firms performed. If Jensen’s core thesis were true, we would expect CEOs with these elite credentials to outperform the market.
We thus formed monthly portfolios for bankers and consultants. As we did with MBAs, we then ran industry-controlled Fama-French three-factor regressions. The result: Neither bankers nor consultants produced statistically significant alphas. We also back-tested portfolios designed to favor ex-bankers and consultants and found no significant edge (though consultants had a statistically insignificant edge on bankers).