FOR EXPERT COMMENT:Appointing Celebrities Without Business Experience to Corporate Boards Adds Value, MU Researchers Find

March 17th, 2010

The views and opinions expressed in this “for expert comment” release are based on research and/or opinions of the researcher(s) and/or faculty member(s) and do not reflect the University’s official stance.

COLUMBIA, Mo. ­— On March 10, stock for J.M. Smucker, the famous jam company, closed at $59.19. While that might not be enough to make heads turn, a University of Missouri finance expert says that the stock has enjoyed a small boost, as much as 2.1 percent, that could be related directly to one of its board members Nancy Lopez, the well-known golf professional. Whether endorsing toothpaste or trust funds, celebrities are often used to increase company exposure. Steve Ferris, a professor of finance at the University of Missouri Robert J. Trulaske, Sr. College of Business, says that the announcement of celebrity appointments to corporate boards produces an immediate, positive market response.

Ferris, along with researchers from SUNY Buffalo, St. John’s University and the University of Nebraska, examined the stock market reaction to the appointment of nearly 800 celebrities to the boards of U.S. public corporations,  and preliminary results show highly positive returns in excess of expectations for the stocks’ increase in value. They concluded that the market reacts to the prestige and status the appointments bring, generating greater visibility for the company. 

Although the researchers found that the appointment of popular business CEOs and entrepreneurs was common and accounted for nearly 30 percent of their sample, the large number of politicians who were appointed as directors was surprising, Ferris said. The combination of elected and appointed politicians, such as Gerald Ford, Condoleezza Rice, Evan Bayh, Robert Gates, Andrew Young and Donald Rumsfeld, accounted for almost a quarter of their sample.

“It seems that the market focuses more on the celebrity’s name recognition than any real business experience he or she might have,” Ferris said. 

The researchers also examined whether or not this effect was temporary. They investigated the long-term effect of celebrity directors, examining company stock return performance up to three years following the celebrity’s initial appointment. Regardless of whether the celebrity had related business experience, the appointing companies still enjoyed superior long-term performance.

“In a direct comparison of celebrity directors having related experience to non-celebrity directors with comparable experience, we found that the two- and three-year stock return performance is still higher for companies that appoint celebrity directors,” Ferris said.

To better understand whether companies with celebrity directors were more visible, the researchers examined the stock analyst coverage and institutional ownership of these companies. They found that analysts revise their earnings more frequently for companies after the appointment of celebrities to the board, suggesting that analysts find these companies more interesting to follow. Also, the number of institutional owners and the level of their investment in these companies increased after the celebrity appointment.

“Celebrities increase a company’s visibility in such a way that it becomes more prominent to the investment community, which is good for the company and its shareholders,” Ferris said. 

In spite of recent legislative efforts, such as the Sarbanes-Oxley Act to enhance the overall professionalism of corporate boards, the researchers failed to find anything that suggests the use of celebrities is decreasing.  They also found that the appointment of celebrities as directors occurs most often in the manufacturing, transportation and communication sectors.

The researchers plan to complete additional research on this issue to gain a better understanding of how the appointments of celebrities affect board culture and the quality of board decision making. Ferris has published more than 110 articles during his academic career, including several in the area of corporate governance and boards of directors in such journals as the Journal of Finance, Journal of Corporate Finance, Journal of Financial and Quantitative Analysis, Applied Economics Letters, and European Financial Management.