The original story appeared on Barron’s on April. 26th.
Like Hollywood and Corporate America, Chinese companies have been paying up for celebrity talent. But the Chinese may not be getting much bang for the yuan.
In a recent academic study that examined costs and benefits of hiring star CEOs in China, researchers found that companies paid more for big dogs with celebrity status than for run-of-the-mill, unknown execs. Martin Conyon of the University of Pennsylvania, Lerong He of the State University of New York’s College at Brockport, and Xin Zhou of Fudan University defined star status in China as membership in one of China’s leading political organizations.
Short Term: For about nine months a celebrity CEO in China had a positive impact on the share price, which then faded like fame itself.
They discovered that for about nine months a celebrity hire had a positive impact on a company’s share price, which then faded like, well, fame itself. “It is economically rational for Chinese firms to hire a star CEO,” noted the paper, which crunched a decade of data since 2000 for almost 600 firms listed on Chinese exchanges. At least, until it’s not.
This may be bigger than just China. Other researchers have found comparable phenomena in the celebrity-crazy U.S. After short-term market reactions to star hires, the net long-term benefits proved dismal. Ulrike Malmendier of the University of California, Berkeley, and Geoffrey Tate of UCLA found negative share performance at companies whose CEOs won prestigious business awards. Unfavorable results also followed when CEOs assumed outside board seats or wrote a book, and was worst at firms that had weak corporate governance. You get what you pay for, but it may not be exactly what you want.