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Friday, March 25, 2005

What Do Bosses Do? (from Stumbling and Mumbling)

Chris Dillow over at Stumbling and Mumbling analyzes how much impact a boss has on a firm's stock returns. His take:

How much difference do chief executives really make to a business? “A lot,” say shareholders in Prudential. They raised the price of the company by £580 million yesterday when they learned that Jonathan Bloomer was to be replaced as CEO by Mark Tucker.

If this judgment right, there's something very wrong about the market for chief executives; either Mr Bloomer was massively overpaid or Mr Tucker is grossly underpaid. But is it right?
Of course, the Pru’s price fell sharply under Mr Bloomer’s watch. But how much of this is really his fault?

A proper answer to this question requires us to do two things. First, we must identify the Pru’s stock-specific returns. And then we must identify what proportion of these can be attributed to the chief executive.

Both steps are tricky.

Click here for the entire article.

In answering the question, he discusses the CAPM, systematic vs. ideosyncratic factors, behavioal finance, and market efficiency. Nicely done, with a lot of issues for classroom discussion.

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