By JACK HOUGH
When stock investors turn cautious, they tend to favor steady Eddies over volatile Victors. Modest valuations, dividends and dependable earnings fall into fashion and high prices based on expectations of splendid but distant growth fall out. New research suggests that a clue found far away from financial statements can help predict which companies are run by risk-takers: Check the bosses for pilot licenses.
Yes, the idea is a little flighty, and no, you're not cleared to take off from work and start a day-trading operation based on the findings.
Behavioral finance researchers have long studied links between personality traits and management styles. A quick review of the literature suggests that America's least-daring boss grew up during the Great Depression, lacks an MBA, attends church and votes Republican. At work, he shuns debt and he prefers paying dividends to making big acquisitions. He earns steady returns for investors but he skimps on research spending, which crimps his firm's innovation.
If some of that seems a stretch, you'll be delighted to know that a working paper by researchers at Michigan State University and the University of South Carolina suggests it might be. The authors studied manager changes due to death, illness and old-age retirement between 1990 and 2007 and found that policies and profits were little changed. Maybe that means firm traits matter more than boss traits. Or, maybe it means the bosses left an impression.
Against this backdrop, a pair of professors had a hunch about risk-takers. Recreational pilots are, statistically speaking, nuts. Forget what you've heard about flying being safer than driving. Professionally piloted, tray-in-the-upright-position-style passenger flights are plenty safe, but small-craft personal flying, where the captain, crew and passenger are the same person, has a fatality rate 30 times that of driving. Crop-duster flights are safe by comparison. Insurance companies reckon the mortality rate for a 40 year-old healthy male is doubled if he's a recreational flyer. Thus, a license for small-craft flying might be a pretty good indicator of a genetic tendency toward risk-taking behavior, figured Matthew Cain of the University of Notre Dame and Stephen McKeon of the University of Oregon. And pilot-CEOs might use a white-knuckle style when it comes to allocating capital at work.
The professors used Federal Aviation Administration data to build a list of CEOs who fly on the side. They found, after adjusting for factors like age and industry, that CEO pilots use more leverage and make more frequent acquisitions. They also produce greater stock return volatility. And they sometimes wear mirrored sunglasses while playing shirtless volleyball and high-fiving. (I had to infer that last part because Cain and McKeon didn't make the connection.)
Don't expect securities regulators to begin requiring companies to disclose in their annual reports which managers hold pilot licenses and how many hours they recently logged. "Keep in mind that our proxy for sensation-seeking is a rough one," cautions Cain. Anyhow, it wouldn't be clear how to use the information. Risky business, including leverage and volatile returns, can pay off nicely during boom years. During bust years, not so much.
The study didn't show whether joystick CEOs are better or worse for long-term returns, although interestingly, it did show that when they make acquisitions, share prices for their own firms tend to jump nicely when the deals are announced, says Cain. In other words, the market seems to think daredevil CEOs choose their targets well. That aside, the best CEOs are likely those who know when to go full-throttle for growth and when to ease off and raise the flaps.
By the way, I can only assume from Google's (GOOG)
Below are listed a squadron of corner-office barnstormers, along with recent stock returns for their companies.
Ford Motor (F)
3-year cumulative total return: 116% (S&P 500: -3%)
3-year cumulative total return: 21%
3-year cumulative total return: -20%
Dean Foods (DF)
3-year cumulative total return: -65%
Scotts Miracle-Gro (SMG)
3-year cumulative total return: 83%
3-year cumulative total return: -4%
3-year cumulative total return: 42%