Monday, November 7, 2016

Sell the stock, when....

As a curious side note, researchers have also documented a Businessweek phenomenon. When CEOs receive high profile awards, including being named one of Businessweek’s “Best Managers,” their companies subsequently underperform over the next three years as measured by both accounting profits and stock price. However, unlike the Sports Illustrated effect, this effect appears to be more than reversion to the mean. According to Ulrike Malmendier and Geoffrey Tate, economists at the University of California at Berkeley and UCLA, respectively, when CEOs achieve “superstar” status, they get distracted by their new prominence. They write their memoirs. They are invited to sit on outside boards. They begin searching for trophy spouses. (The authors propose only the first two explanations, but I find the last one plausible as well.) Malmendier and Tate write, “Our results suggest that media induced superstar culture leads to behavioral distortions beyond mere mean reversion.” In other words, when a CEO appears on the cover of Businessweek, sell the stock.

Charles Wheelan, Naked Statistics: Stripping the Dread from the Data (Kindle Location 1872), 2014, W. W. Norton & Company

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