On average, recession-minded CEOs took about one and a half years less than their boom-time counterparts to reach the top positions, the authors calculated. They had less mobility across industries and companies, and had fewer jobs before being promoted to CEO, suggesting that they had more internal career tracks. “People who start in worse economic times might find it more difficult to communicate their quality to the outside market since the firm is not growing,” the authors reason. “However, managers who start in boom times will have positive results even if they did not personally contribute a lot to the success of the firm.”
Managers who start their careers during recessions also have different experiences at the beginning. They are less likely to start out as a consultant (which has been shown to correlate with eventually becoming a CEO), more likely to begin in a small private firm, and less likely to land a job at one of the top 10 firms for producing future CEOs.
The tough early road also has lasting effects on CEOs’ final destinations and compensation. On average, recession-minded CEOs end up in firms about 20 percent smaller than CEOs who started their careers when the economy was thriving. The researchers found no discernible differences in the profitability or value of the firms. But based on an analysis of stock options received and exercised, recession-minded CEOs received 17 percent lower compensation on average than their non-recession peers.
To study the impact that a recession might have on management style, the researchers didn’t need detailed data on individual career paths, so they expanded their sample to 4,152 CEOs. Only CEOs who had been in their jobs for at least three years were included, to ensure that they had had time to make a mark on their company.
For this sample, the researchers obtained information from the Compustat database to study firm performance during the time the CEO was in office. They also incorporated data on mergers and acquisitions from the SDC Platinum database and stock return information from the Center for Research in Security Prices.
Besides investing less in capital projects and R&D, CEOs who started in recessions employed significantly lower financial leverage compared with non-recession CEOs. Their companies also had lower cash holdings, “which is often seen as a sign of better financial management and less wasteful slack in the use of capital,” the authors write, which suggests “that they are able to run a tight ship and/or get financing from their customers rather than having to finance them.”
But firms led by recession-minded CEOs also paid higher effective tax rates, which the authors argue is probably because these CEOS are more worried about the costs of financial distress that comes with having more leverage or using other aggressive tax strategies.
Finally, recession-minded CEOs managed their companies’ operations more conservatively, with more diversity across business segments, probably to guard against risk to a specific industry. They also had lower general and administrative expenses while producing higher profit margins. The stock-return volatility of firms led by recession-minded CEOs was 3.2 percent less, and these CEOs also appeared to engage more in earnings management, suggesting that a “conservative ‘tone at the top’ may put more pressure on mid-level financial reporting managers to manage earnings to meet or beat earnings targets, or to avoid debt covenant violations,” the authors write.
Boards should take these findings into account when choosing CEOs, the authors advise. After extended periods of pronounced growth, many managers may have learned how to steer booming companies, but would they know how to turn around a distressed firm? Because the results indicate that recession-minded CEOs do not perform differently during down times or booms, the authors argue that managerial styles, once formed, are relatively fixed over time.