Top Managers' Academic Credentials and Firm Value

• Published date: 01 April 2016
• Author: Sung Wook Joh,Jin‐Young Jung
• DOI: http://doi.org/10.1111/ajfs.12127
• Date: 01 April 2016

Top Managers’ Academic Credentials and

Firm Value*

Sung Wook Joh

College of Business Administration, Seoul National University

Jin-Young Jung

**

College of Business Administration, Inha University

Received 29 August 2015; Accepted 15 February 2016

Abstract

This study investigates whether top management teams’ (TMTs) academic credentials from

prestigious universities can be a source of competitive advantage. We examine the academic

backgrounds of 72,165 top managers in 590 non-financial firms in South Korea from 1990 to

2006. We find that firms with a higher proportion of top managers from top universities

have a higher Tobin’s Q. Furthermore, this relation is stronger in challenging environments

when firms face higher volatility, more growth opportunities, or financial distress, or when

managers have greater discretionary power or are held accountable for their decisions. These

results suggest that the effects of TMTs’ human capital on firm value vary in the contexts of

organizational and corporate environments. In short, our study suggests that education from

elite schools is an important managerial attribute that contributes to performance.

Keywords Management academic credentials; Firm value; Top management team; Challeng-

ing corporate environments

JEL Classification: G30, G32, G34

1. Introduction

Ability is of little account without opportunity.

Napoleon Bonaparte [1769–1821]

As most top managers have graduated from colleges, whether top managers

have a college education does not often significantly affect their firms’ economic

*Joh appreciates the grant from the Institute of Management Research and Institute of Bank-

ing and Finance at Seoul National University. Jung appreciates the Inha University Research

Grant.

**

Corresponding author: Jin-Young Jung, College of Business Administration, Inha Univer-

sity, 6-103, Inharo 100, Nam-gu, Incheon, Korea. Tel: +82-32-860-7810, Fax: +82-32-863-

1337, email: jyjung@inha.ac.kr.

Asia-Pacific Journal of Financial Studies (2016) 45, 185–221 doi:10.1111/ajfs.12127

©2016 Korean Securities Association 185

outcomes. In contrast, top managers with academic credentials from prestigious

universities are relatively few. Do top managers with superior academic credentials

add value to their firms? Since academic credentials, like other educational back-

grounds, affect management decision making on corporate strategy and policies,

1

they may affect firm performance. If so, as important characteristics of firms’ top

managers often affect organizational outcomes (Hambrick and Mason, 1984), we

can argue that top managers’ education from a top university can be an important

characteristic of human capital and a source of competitive advantage.

2

However,

researchers rarely show the impact of managers’ prestigious school education on

performance except with regard to fund managers in the financial sector (Che valier

and Ellison, 1999; Gottesman and Morey, 2006) when it helps managers advance

their careers (Useem and Karabel, 1986). This study investigates whether TMTs

with superior academic credentials improve firm value in non-financial firms.

Moreover, we further examine how economic conditions and specific corporate

environments might affect the relation between TMTs’ academic credentials and

firm value. According to the resource-based view, internal and external corporate

environmental resources can increase the impact of managerial characteristics on

firm performance.

3

Specifically, the effects of managerial human capital on firm

value can be amplified when managers have more discretionary power, when their

decisions are more critical to corporate policy making, or when dynamic managerial

capabilities become an issue in regimes of rapid change. We argue that top man-

agers with training from prestigious schools can have greater impact on firm value

in challenging corporate environments in which they have greater discretionary

power and decision-making scope.

Using firm-level management academic credentials (MAC) from prestigious uni-

versities as a proxy for TMTs’ human capital, we examine the effects of firm-level

MAC on Tobin’s Q. To isolate the effects of MAC from those of other factors affect-

ing human capital, we control for other managerial characteristics such as age,

tenure as top managers, years of education, and expertise. We focus on how the

effects of MAC vary in challenging environments, such as when firms have better

1

Previous literature shows that the educational background of CEOs or top management

teams (TMTs) in finance or law, or differences in knowledge and experience, affect corporate

strategy and policies. Differences in specialty and academic degrees affect environment disclo-

sure policy (Lewis et al., 2014). Managers with higher human capital (higher educational level

or heterogeneity in specialty) often make better management decisions and develop superior

corporate strategies to address corporate challenges (Wiersema and Bantel, 1992).

2

One might argue that the innate characteristics of top managers and human capital are the

important factors of the firm value, not the academic credential per se. However, it is mean-

ingful to examine the association between managerial academic credentials and firm value in

that the credentials are observable while the human characteristics are deemed “unobservable”.

3

For more discussions see Haleblian and Finkelstein (1993) and Teece et al. (1997).

186 ©2016 Korean Securities Association

S. W. Joh and J.-Y. Jung

governance, high ownership concentration, higher volatility, more growth opportu-

nities, or financial distress.

In our analysis, we address the issue of the ex-ante direction of causality

between managerial attributes and firm performance. While managers with aca-

demic credentials from elite universities can improve firm value, better performing

firms can also recruit better managers. We estimate a system of simultaneous equa-

tions with Tobin’s Q and MAC as endogenous variables. We also discuss whether

the effects of MAC represent those of top managers’ social capital, because human

capital and social capital are often interdependent.

4

Education from top schools

enhances social capital, as graduates from top schools constitute a large portion of

elites in business, government, and politics. Hence, we examine whether the effects

of MAC remain after controlling for the magnitude of sociopolitical networks.

We test our hypotheses on 590 listed, non-financial firms in South Korea from

1990 to 2006 for a total of 7,100 firm-year observations. We focus on South Korean

firms for three reasons. First, Korea’s educational system has a well-established, uni-

versally recognized hierarchy of universities. College admissions strictly depend on

test scores, as universities are required to select students solely on the basis of aca-

demic merit. Second, the experience of high growth in the early 1990s and then the

1997 Asian financial crisis exposed many Korean firms to volatile corporate environ-

ments. Many firms faced an increased risk of financial distress during the economic

crisis, engaged in subsequent restructuring, or experienced corporate governance

reform. Finally, the prevalence of Korean business groups (chaebols) provides a fram e-

work for examining the role of managers in different business organizations. While

managers tend to make corporate decisions in stand-alone firms, group headquarters

or controlling families are the decision makers in chaebol-affiliated firms.

We focus on the characteristics of TMTs instead of chief executive officers

(CEOs) or boards of directors (BOD). First, Korean CEOs have short, often unre-

newed terms, and those who are not from controlling families have limited influ-

ence. The mean term of a CEO is 3.5 years and on ly 36% of professional CEOs

have their terms renewed (CEO Score, 2015). Second, South Korean firms did not

appoint outside directors until 1999 when the South Korean government intro-

duced governance reform measures (Black and Kim, 2012). Third, outside directors

have little influence and little involvement in corporate decision-making processes

when transferring firm-specific information is costly (Joh and Jung, 2012). Hence,

TMTs have greater overall influence on firms than do CEOs or outside directors.

Grounded in the resource-based view of the firm, we show the effects of man-

agerial human capital, specifically academic credentials. Our data show that greater

MAC at the firm level is linked to greater firm value when measuring MAC as the

4

Becker (1964) defines an individual’s expertise, experience, knowledge, reputation, and skills

as “human capital” whereas Nahapiet and Ghoshal (1998, p. 243) define an individual’s

actual and potential resources embedded within, available through, and derived from the net-

work of relationships as “social capital”.

©2016 Korean Securities Association 187

Top Managers’ Academic Credentials and Firm Value