The GE Paradox: Competitive Advantage through Fungible Non-firm-specific Investment
Derek Lehmberg
The University of Western Ontario
Richard Ivey School of Business
London, Ontario, N6A 3K7, Canada
Tel. (519) 643-0024
Fax. (519) 661-3485
e-mail: dlehmberg@ivey.ca
W. Glenn Rowe
Paul MacPherson Chair in Strategic Leadership
The University of Western Ontario
Richard Ivey School of Business
London, Ontario, N6A 3K7, Canada
Tel. (519) 661-3299
Fax. (519) 661-3485
e-mail: growe@ivey.ca
Roderick E. White
The University of Western Ontario
Richard Ivey School of Business
London, Ontario, N6A 3K7, Canada
Tel. (519) 661-3252
Fax. (519) 661-3485
e-mail: rewhite@ivey.ca
John R. Phillips
Odette School of Business
University of Windsor
Windsor, Ontario, N9B 3P4, Canada
Tel. (519) 253-3000 ext. 3115
Fax. (519) 973-7073
e-mail: jrp@uwindsor.ca
Acknowledgements: The authors would like to Geoff Kistruck and Jay Barney for their ideas
relating to this project. This research was funded by the Social Sciences and Humanities
Research Council of Canada standard grant number 410-2003-0447.
Keywords: succession, event study, leadership, GE effect, general manager development
© 2008 Lehmberg, Rowe, White & Phillips
Abstract
This study addresses two questions: 1) Does General Electric have an exceptional ability
to develop non-firm-specific general management talent; and 2) How can GE’s investment into
non-firm-specific, non-proprietary managerial capabilities be explained theoretically? Our
analysis provides evidence that GE has an extraordinary managerial development capability.
Our theory suggests GE’s managerial development process is Valuable, Rare, Inimitable, and
Organized to be exploited, and, therefore, a source of sustained competitive advantage. This
process produces a flow of managers with the potential to be sources of temporary competitive
advantage for GE. Outward flow of executive talent is a required byproduct of the process.
The GE Paradox
THE GE PARADOX
Conventional wisdom suggests the General Electric Corporation (GE) excels in finding
and developing managerial talent. However, many GE managers leave the firm for employment
elsewhere. Existing theory in the field of strategic management does not predict or explain GE’s
investment into fungible and non-controllable managerial resources. Herein, lies the paradox:
How can GE benefit from developing managerial talent, which it cannot control, and that is
fungible to other firms?
The large number of ex-GE executives at the helm of Fortune 500 companies has given
GE a reputation as a breeding ground for CEOs. Practitioners have noted that firms hiring exGE executives experience an increase in market performance (e.g. Colvin, 1999). To date this
performance benefit, which we term “the GE Effect” has not received a rigorous empirical
examination. Accordingly, this paper first seeks to address the question: Are managers from GE
superior to their peers in the general pool of CEO management talent?
Both the Resource Based View and Transaction Cost Economics suggest that firms
should invest in firm-specific, firm-owned assets (e.g. Barney, 1997; Barney, 2002; Williamson,
1979). If managers are able to take the benefits of their background and outperform their nonGE peers in the general talent pool, it suggests that GE is investing in generalized talents held by
individuals who can leave GE and personally benefit from GE’s investment. In other words,
theory appears to predict the opposite of what GE is doing. A theoretical explanation is lacking
for GE’s approach to talent development. This paper provides a plausible theoretical explanation
of the GE paradox. The paradox being: How can it be in GE’s interest to develop fungible
managerial talent that migrates outside the firm?
3
The GE Paradox
Investigation of GE-specific effects warrants attention in the academic strategic
management literature for several reasons. First, because extant theory does not explain or
predict the GE Paradox, it is an opportunity to further develop existing theory. Second, outliers
merit special attention in strategy research (Aharoni, 1993; Daft & Lewin, 1990; Rouse &
Daellenbach, 1999). Studying outliers allows us to generalize back to theory (Stinchcombe,
1968), especially back to the Resource Based View of the Firm. Other outliers such as Toyota
have been the subject of extensive academic and practitioner research resulting in generalizeable
findings. GE is an outlier in a number of ways, and it is not well understood. For example,
theory in both finance and strategic management suggests there is little place for highly
diversified conglomerates in developed countries with transparent markets, and yet GE thrives.
Finally, GE is often discussed in the classroom. It is one of the most frequently
mentioned firms in strategy textbooks, and is commonly used in case studies as well. Harvard
Business School has over 20 different GE cases in print. If we are to be intellectually honest
educators, we must strive to better understand what we teach. Although GE’s ability to develop
managerial talent has been analyzed in the practitioner press (e.g. Colvin 1999; Kratz 2005;
Groysberg, McLean & Nohria, 2006), it has not received rigorous academic attention.
Our phenomenon-based approach and our research questions are admittedly
unconventional for the strategy literature. Reflecting this, the organization of this paper is
somewhat different from the norm. Below, we discuss the GE Effect and the GE Paradox in
further detail. Then, we report on a stock price event study of announcement events for firms
appointing CEOs from GE and for a comparison group of firms appointing non-GE executives to
CEO positions in order to ascertain whether the market expectation is that GE managers will be
better CEOs than those from the general pool of management talent. In addition, we perform
4
The GE Paradox
post hoc analyses to search for evidence of differences in operational performance between firms
hiring ex-GE executives and a comparison group of firms hiring executives from the general
talent pool. Further, although we believe that GE may be the most widely recognized developer
of managerial talent, other firms have also been mentioned for this capability. Therefore, we
search for evidence of other firms having similar capabilities to GE. Finally, we conclude the
paper by theorizing on the GE Paradox – in other words, how GE can benefit from developing
executives when many leave to become CEOs of other firms. Our study will be of interest to
those who study corporate strategy, strategic leadership and strategic management.
BACKGROUND AND HYPOTHESIS
In many respects, General Electric Corporation (GE) can be considered an outlier. First,
GE is a rare example of a successful US-based conglomerate. Although conglomerates were
common in the 1960s and 1970s, most were split into pieces and sold off after that period
(Nohria, Dyer & Dalzell, 2002). Not only has GE survived, it has prospered. GE is the most
successful, large, diversified organization in the world.
GE is also an outlier on many measures of performance. Over the period 1993 to 2002, it
was ranked first or second in Market Value Added (MVA) in the Stern Stewart Performance
1000. In the 2001 Stern Stewart Performance 1000 rankings, General Electric had the number
one spot with an MVA of $427 billion. From 1993 to 1996, GE competed with Coca-Cola for
the top spot, and from 1997 to 2002 it vied with Microsoft.
Finally, GE is an outlier in terms of managerial talent and its development. GE’s
leadership development system has not only produced senior managers for GE but also “an
astonishing number of CEOs of other major companies” (Colvin, 1999: 238-239).
5
The GE Paradox
The above suggests that GE is an outlier in several ways – diversified business,
exceptional performance, and managerial excellence – and it has been suggested that they are
interrelated. GE’s outstanding performance is believed to be, in significant part, a result of GE’s
executive development system (Byrnes, 2000; Colvin, 1999; Grant, 1995; Rowe, 2001; Sherman,
1995). GE’s large number of business units create the need to deploy, and offers the opportunity
to develop, general management and strategic leadership talent. GE has invested heavily in the
identification, selection, and development of that talent within its management cadre. This
corporate ability is believed to be a key source of sustained competitive advantage (Bartlett &
McLean, 2005).
GE’s Leadership Development System
There is substantial practitioner literature hailing GE’s leadership and management
abilities. Colvin argues that GE is one of two legendary “caldrons of managerial brilliance”
(1999: 238). GE’s leadership development has been identified to be one of the best by Hewitt
Associates (Fredman, 2002; Goldsmith, 2004; Pomeroy, 2005). GE gives its high potential
executives experience in many disparate businesses (Byrnes 2000; Colvin, 1999). Kahn (1999)
refers to GE as a CEO “breeding ground.” Grant (1995) argues that GE’s executives are shaped
by a system that is unparalleled at identifying and developing leadership talent and is more
comprehensive than any outside of the military.
GE’s leadership development has a long history. Welch and his predecessors emphasized
managerial talent and its development. GE’s John F. Welch Leadership Center at Crotonville,
NY turned 50 years old in 2006 (Durett, 2006). Ralph Cordiner, GE’s president in 1958, was
quoted in the Academy of Management Journal as saying “Not customers, not products, not
6
The GE Paradox
plants, not money but managers may be the limit of General Electric’s growth” (Whitehill, 1958).
This argument is reflective of Penrosian thinking (Penrose 1959). Welch put it differently but the
emphasis upon people was similar: “people first, strategy second” (Tichy & Cardwell, 2002:
154). This emphasis is seen in Jack Welch’s active participation in GE’s executive development
process, which reportedly consumed 30 per cent of his time (Rowe, 2001).
GE’s executive development capability is broader and more involved than just GE’s
training and education programs; rather, it is an entire system encompassing identification,
selection, and development of executive resources. Many pieces of this system — for instance,
job assignment — are integrated into other management processes (Frost & Kerr, 1997). Over
the long history of executive development at GE, the system has evolved in a path dependent
manner to become socially complex and embedded in the organization. The boundaries between
GE’s talent development process and other organizational processes are not distinct. Although
much has been written about the system, we are not aware of any firm that has been able to
replicate it. This may be due to the cost implications of the system. However, it is more likely
due to the informal, socially complex, path dependent and tacit nature of the system.
GE develops more general management talent than it utilizes. Its executive development
system selects and develops good managers and is coupled with a disciplined merit-based
evaluation and promotion process (Colvin, 1999). As a result, better managers are found the
higher one goes in the GE organization. At the top levels, these executives vie to become the
next CEO of GE. Those who are not selected, or have inappropriate timing often leave for CEO
positions outside of the firm; a process encouraged and even facilitated by GE.
GE ran “a horse race” amongst internal candidates resulting in the selection of Jack
Welch as CEO in 1980 and had a similar procedure for Jeffrey Immelt’s selection in 2000.
7
The GE Paradox
There were at least six qualified internal candidates at the beginning of both races. As the field
narrowed, some executives found they were out of the running and most left to take high-level
positions in other firms (Bower, 2004). This is consistent with Vancil (1987) who argued that
after a horse race most or all of those who do not win leave.
In addition to running horse races, GE has also encouraged long CEO tenure by choosing
relatively young candidates. Both Welch and Immelt came through the GE system and were
appointed CEO while in their mid-40s with the expectation they would serve approximately 20
years. During this time, as would be expected, many CEO-caliber candidates left GE to pursue
leadership positions at other firms. Tichy and Cardwell (2002) list 19 CEOs who graduated from
the CEO academy at GE during Welch’s tenure. Kratz (2005) states, “[w]hen a company needs a
loan, it goes to a bank. When a company needs a CEO, it goes to GE.” Although the focus of
our study is at the CEO level, many executives also leave GE to join other firms at midmanagement levels
The “GE Effect”
Much mythology surrounds the “GE effect.” Until now, however, the question has not
been systematically and rigorously examined. The practitioner literature includes numerous
reports of a positive effect (e.g., Colvin, 1999; Groysberg et al, 2006) – in other words, that exGE managers make superior CEOs relative to those from the general pool of management talent.
However, negative effects and no effects (e.g., Kratz, 2005) have also been reported. As a group,
these studies suffer from small sample size and other limitations. Insufficient explanation of
methodology used in these studies makes it difficult to determine the extent of rigor.
Furthermore, interpretation of the results is difficult as detailed statistical results, including p-
8
The GE Paradox
values, are not reported. We present the findings of several articles in the popular business press
that have studied the performance of firms with CEOs from GE.
Kratz (2005) compared stock price performance of 34 Standard & Poor’s firms headed by
ex-GE executives against the S&P 500 index, and found mixed results: half of the group did
better and half did worse than the index. On the other hand, when Colvin (1999) compared the
stock price appreciation of five companies led by ex-GE general managers to the S&P 500, he
found that these firms had average compounded annual stock price appreciation of almost 25 per
cent; compared to 15 per cent for the S&P 500.
Two studies analyzed the reasons behind performance differences of CEOs from GE.
Byrnes (2000) found many former GE executives stumbled after they assumed the CEO position
at other companies. She cites several reasons for this finding including: trying to implement the
GE culture too quickly, inappropriately bringing former GE managers into their company, and
firing/retiring senior managers who know the firm’s customers and competitors. Groysberg et al.,
(2006) reported a large variation in performance of 20 ex-GE executives who became CEOs of
other firms. They ascribed this performance variation to differing applicability of human capital
in the new firm. Some kinds of human capital are more fungible than others. Groysberg et al.,
(2006) argued that where ex-GE executives became CEOs of firms with a relatively similar
environment to GE, they were able to apply their human capital more effectively, and deliver
higher performance, than in cases where the new firm was different.
Taken together, the above studies offer evidence both in support of and against the
existence of the GE effect. It has been asserted that GE develops an abundance of exceptional
leaders. Furthermore, many of these GE-trained leaders go on to other firms and use the talents
they developed while at GE to improve the performance (or sustain the already high
9
The GE Paradox
performance) of the companies they join. In this process, valuable skills developed at GE are
diffused into the general population of firms. The counter-thesis has also been argued. GE may
(or may not) develop great leaders, but, if it does, their talents are specific to the GE context.
Based on this reasoning, managers from GE would have no more effect upon the performance of
firms they join than managers recruited from the general population of similarly qualified
candidates.
Relevant theoretical lenses in the strategic management area do not predict or explain the
GE effect. TCE suggests firms will internalize transactions with high asset specificity
(Williamson, 1979). Although TCE does not preclude GE from providing managerial
development, it suggests such training should be GE-specific in nature. If this were the case exGE managers would not be better than the general population of qualified candidates at
improving the performance of firms other than GE. Similarly, RBV would suggest firms should
not invest in fungible resources the firm does not control (e.g., Barney, 1997; Barney, 2002). If
neither RBV nor TCE appear to predict or explain the GE effect, then either it does not exist and
existing theory is not refuted, or there is an opportunity to further develop theory.
Hypothesis
The GE effect is relative. GE managers are hired by other companies because they
appear to be the best alternative to those making the hiring decision. To examine whether ex-GE
executives represent a valuable and fungible resource requires comparison between ex-GE
executives and executives not from GE. Analysis of CEO succession events allows such
comparison. Accordingly, we first perform a stock price event study measuring changes in
market expectations of future performance due to announcements of appointments of ex-GE
10
The GE Paradox
executives and comparison (non-GE) executives to CEO positions. These stock price changes
reflect changes in market expectations of the net present value of the risk-adjusted rate of returns
for the firm. We provide further rationale for our choice of firms in our methodology section.
If ex-GE managers have managerial capabilities superior to those in the general
management pool, and these capabilities are portable to firms other than GE, then firms hiring
them should expect to realize superior performance if they hire a CEO with a GE pedigree than if
they hire a CEO from the general management pool, assuming that the executive from GE does
not appropriate all of the performance differential in the form of compensation. Accordingly,
market expectations should react more positively to the announcement of the CEO appointment
of an ex-GE executive than is the case when firms announce the CEO appointment of an
executive without GE experience. Accordingly, we hypothesize:
H1: Firms announcing the appointment of ex-GE executives as their CEOs will
experience a greater positive change in market expectations than firms
announcing the appointment of non-GE executives as their CEOs.
Stock prices change in accordance with market expectations. Market efficiency assumes
these expectations are related to future (cashflow) performance of the firm and are based upon
the information made available by the event. In stock price event study methodology the event
represents new information which may affect market expectations of future performance. When
well done this methodology excludes conflicting events and rules out alternative explanations for
changes in stock prices. Positive abnormal returns identified in a succession event study suggest,
all else equal, the market expects at the time of the announcement that the firm will perform
better with the new CEO. However, relating expectations to actual performance outcomes is
11
The GE Paradox
difficult because all else never remains equal! Other things – unknown at the time of the
succession event – come into play to impact operational performance outcomes.
Given the noisy nature of operational performance measures, and our small, low power
sample, we do not expect to be able to discern operational performance effects. Accordingly, we
do not hypothesize operational performance results. We do, however, give the question further
consideration in post hoc analyses.
If hypothesis one is refuted, it will call into question the unique value ex-GE managers
have outside of GE. Such a finding will not disprove their value within GE. Instead it will raise
the possibility that: a) the capabilities held by ex-GE managers are GE-specific and not fungible;
or b) these managers have appropriated the entire expected gains they bring to the firm through
their compensation package.
There is a great deal of hype around GE as a general management talent machine. It is
possible that this hype — and not the actual ability of ex-GE executives to improve performance
— could affect the market expectation of firms hiring former GE executives as their CEOs.
However, if CEOs from GE perform no better than average after the succession than the market
would over time discern this relationship and any hype that may have existed would be
discounted. The market would have to be remarkably inefficient to not learn overtime. As will
be reported we found no evidence of hype.
STUDY METHODOLOGY
This study used two methods: a stock price event study method and an analysis of firm
financial performance based on historical performance data. We describe both analyses below.
12
The GE Paradox
Our event study was undertaken to analyze if firms hiring ex-GE executives to be their
CEOs benefited from increases in their share price compared with a group of firms that hired
non-GE executives. Event study methodology is commonly used in studies of top management
succession (e.g., Beatty & Zajac, 1987; Davidson, Worrel & Cheng, 1990; Hayes, & Schaefer,
1999; Lubatkin, Chung, Rogers & Owers, 1989; Shen & Cannella, 2003). The market value of
the firm is assumed to be based upon the market’s evaluation of discounted future cash flows,
based upon all publicly available information (McWilliams & Siegel, 1997). In other words,
some degree of market efficiency is assumed by this methodology. The semi-strong form of the
market efficiency hypothesis states that markets adjust to factors in all publicly available
information (Fama, 1970). It has found general support in the literature (Fama, 1998; Malkiel,
2003). Although some question the level of market efficiency existing in the financial markets,
this methodology remains attractive and commonly used because it allows the researcher to
reduce or control for variance that is not related to the announcement in question. Event studies
measure the change in the value of firm shares in response to a change in information relating to
these shares, controlling for overall market variation and excluding conflicting events.
One limitation of the method is that it can only be used for publicly traded firms. Also,
inclusion of firms not trading on the same markets presents a potential issue. These issues did
not represent a significant problem in our study although they reduced the sample size slightly.
In our study, a comparison group is required to assure that changes in share value are
attributable to the CEO coming from GE and differ from those obtained by the appointment of
outsiders not from GE to the CEO position. Below, we discuss how the executives and firms
comprising the GE group were identified, and how firms for a comparison group were chosen.
13
The GE Paradox
GE’s annual reports from 1975 to 2002 were used to create a list of GE top executive
management over the period. This period included two CEO transitions, from Reginald H. Jones
to John F. Welch Jr. in FY 1981, and from John F. Welch Jr. to Jeffrey R. Immelt in FY 2001.
The total number of executives identified was 649. An estimate of GE tenure for these
executives was created by analyzing the changes in the composition of those executives listed in
the annual reports over the different years. In two cases, CEOs were identified who had
significant GE executive tenures below the level reported in the annual reports - these were
added to the list of GE executives increasing our list to 651. The careers of those executives who
left GE over the period of our study were tracked using Bloomberg Financial database, Factiva,
Standard and Poor’s register of corporations, Directors and Executives 2003, the Dun and
Bradstreet Reference Book of Corporate Managements 2002, and Internet searches.
The sample of executives for the study was selected from this group based upon the
following criteria. Executives must have spent a minimum of five years with GE and some of
this must have been at the executive management level. After leaving GE, the executive must
have become a CEO, although we did not require that the executive be appointed to the CEO
position immediately upon departing GE. In addition, we required that the firm with which the
executive took the CEO position be a public company listed upon a U.S. stock exchange. Of the
651 GE executives identified, relevant public information was unavailable for 102. From those
remaining we identified 43 who met all of the criteria listed above.
Announcement dates for these 43 executives were identified from announcements in the
Wall Street Journal, Dow Jones News Ticker, Business Wire, Associated Press Newswire, and
Reuters. McWilliams and Siegel (1997) state the importance of checking for confounding events
at the same time of the event being studied that might impact the share price and produce
14
The GE Paradox
misleading results. Examples of confounding events include announcements of changes to
earnings, sales, forecasts, M&A activity, etc. (McWilliams & Siegel, 1997). We checked the
Wall Street Journal for other announcements related to each firm in a window beginning 10 days
prior to the announcement and ending 10 days after. Four firms were found to have potentially
confounding events. Three firms made material announcements relating to subjects including
renegotiation of bank loans, outcomes of major lawsuits, and major changes in strategic direction.
One of the firms went ex-dividend. These firms were dropped from the analysis to give a total of
39 CEO appointment announcements for the event study.
In addition to controlling for confounding events, we used a process to identify our
comparison group of outsider CEO appointment announcements that matched the general
timeframe of the announcement and market capitalization of the firms to which ex-GE CEOs
were appointed with those to which the comparison group of CEOs were appointed. We
considered the timeframe first and then we determined the market capitalization. Maintaining
the timeframe minimized the impact of exogenous time-related effects upon the findings. By
using market capitalization as a condition for matching, we, in effect, control for firm size and its
impact upon information dissemination and analyst following (Atiase, 1985; Bhushan, 1989 in
Lang & Lundholm, 1996). First, we searched Factiva for CEO announcements limiting the time
period to one month before and one month after the ex-GE executive’s announcement date.
Whether the successor is an outsider or an insider to the organization may impact share price
change (Davidson, Worrell & Cheng, 1990)? For this reason, we checked each announcement to
determine the incoming tenure for each CEO in the comparison group.
Based upon patterns of the ex-GE executives, we defined outsiders in the comparison
group to be those who had been with the firm for less than three years. After dropping the
15
The GE Paradox
insiders from the analysis, we obtained the average market capitalization levels for each firm
during the month of the announcement, using share price and number of shares outstanding data
from the Center for Research in Security Prices (CRSP). Then, the same calculations were
performed for the ex-GE CEO group.
Finally, each GE executive-appointing firm was matched with the comparison firm with
the closest market capitalization. In two cases, an initial match firm was identified for more than
one observation. This was due to the fact that several ex-GE appointment announcements were
made within a similar timeframe. Where this caused duplication in the matching group, we
selected the announcement with the next closest market capitalization for one of the two
observations so that each comparison firm was used only once in the analysis. A paired samples
t-test showed that the two groups did not significant differ in market capitalization (p = .156).
Because the firms were first matched based upon the announcement’s timing and market
capitalization, and we considered these two criteria to be more important than our third criteria,
there were some industry differences between the GE and comparison groups. Table 1 compares
the number of ex-GE and matching group firms in each three digit SIC industry division.
------------------------------------------------Insert Table 1 about here
-------------------------------------------------
McWilliams and Siegel (1997) argue that it is important to specify parameters and dates
used in event studies in order to allow replication. We used Eventus software version 8.0 and
share price data from CRSP to perform the event analysis. A 250 day estimation window,
16
The GE Paradox
ending 50 days prior to the event, was used to calculate each firm’s market model. Equal
weighting was used for the market index. A three-day event window, beginning the day before
the announcement, was chosen to accommodate leakage of the announcement while keeping the
window short to reduce the possibility of conflicting events and retain the power of the test
statistics (McWilliams & Siegel, 1997). We include a list of the ex-GE and comparison group
CEOs, and the relevant firms and announcement dates in the appendix.
OLS Analysis
We performed regression analysis upon the event study output. This allowed us to
include additional control variables which could not be included in the event study itself. We
used standardized cumulative abnormal returns (SCAR) as the dependent variable to correct for
heteroskedasticity that may arise when using CARs (Chatterjee, 1991). Our independent
variable was GE-or-match, a dummy variable coded one for ex-GE CEO observations and zero
for the matched group of CEO observations.
Control Variables. The succession literature suggests that market reactions to
succession announcements may be related to firm performance prior to the announcement. For
instance, Friedman and Singh (1989) found that prior performance of the firm had a significant
negative impact upon abnormal returns to succession announcement events. Consequently, we
included Announcement Firm Performance. We consider it possible that the performance of the
firm the executive departs from may also have a reputation effect that impacts market reaction.
To control for this effect, we included Departure Firm Performance.
These were calculated as the ratio of the firm’s share price increase relative to the market
index increase over a five year period for the firm making the CEO appointment announcement
17
The GE Paradox
and the firm where the executive was prior to joining the announcing firm, respectively. This
may seem inappropriate for the CEOs who came from GE. But these announcements were
spread over the 27 years of our study, and we do not view this as problematic. Where five years
of data were not available, we used shorter periods as data allowed. As a result, Announcement
Firm Performance data was shorter than five years for three of the ex-GE executives and nine of
the comparison group. For matching executives who came from nine firms that were not
publicly traded, we used the mean value for Departure Firm Performance. To correct for
skewness and kurtosis, we performed symmetric Winsor transformation (Ferguson, 1961).
Executives in the study often became a CEO in a different industry. To control for
industry change, we created a dummy variable named Industry Change, coded one if they
remained in the same industry and zero if they changed industry, as identified by three-digit SIC
industry codes. For ex-GE executives, the starting SIC code was determined by their last
position before departing GE. Finally, to control for the impact of time upon abnormal returns,
we created a time control variable as follows. We ordered all of the announcements from the
earliest year to the latest year. For those years where there were one or more announcements, we
gave that year a value. The first announcement was in 1979 and the last announcement was in
2002. There were eight years with no announcements, so our time variable ranged from 1 to 16.
By matching firm market value, we controlled for size (Reinganum, 1985), and therefore
did not include a firm size variable. Reinganum (1985) suggests that the reason for the
predecessor’s departure (voluntary, forced) impacts investor reaction. For our sample this was
not a factor. We checked announcements for evidence that departures were forced or voluntary,
and found only one case of forced departure.
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The GE Paradox
RESULTS
Two sets of event studies were run, one for the ex-GE CEO group and one for the
matched CEO group. The results are in Table 2. The ex-GE group had a mean cumulative
abnormal return (CAR) of 3.92 per cent and this is significantly different from zero (p < 0.001).
The matched group had a mean CAR of -0.61 per cent; however this was not significantly
different from zero. This latter result agrees with event studies of executive succession that have
found no significant changes in share prices on average (e.g. Warner, Watts, et al., 1988). Sixtyfour per cent of the ex-GE group had positive CARs, whereas only 44 per cent of the matched
group had positive CARs. These findings support hypothesis 1. A paired-samples t-test of the
SCARs of the ex-GE and comparison groups, showed that they were significantly different
(p=.004).
------------------------------------------------Insert Table 2 about here
-------------------------------------------------
Of the 39 ex-GE executives in the analysis, 11 were promoted from COO or president
positions into the CEO position in the same firm, and the remainder appointed to the CEO
position without having taken either of these positions prior to that time at the firm in question.
As the COO and president positions are frequently used for heirs apparent (Cannella & Shen,
2001), there may be some degree of expectation that those executives occupying these positions
may be promoted to CEO. For this reason, it follows that CARs associated with these
promotions should be lower than for those associated with appointments of outsiders.
Consequently, our event study procedure is a conservative test of the “GE effect.” It can be
19
The GE Paradox
argued that ex-GE executives hired as COO and then promoted within a few years to CEO would
have a two-stage effect; the first when they are hired as COO and the second when they are
promoted to CEO. We only incorporate the second stage effect into our analysis. The mean
CARs for the ex-GE promotion group and ex-GE outsider group were 1.25 per cent and 4.97 per
cent respectively; these results are significantly different (p = .057, equal variance not assumed).
------------------------------------------------Insert Table 3 about here
------------------------------------------------------------------------------------------------Insert Table 4 about here
-------------------------------------------------
Regression Analysis Results
Correlations and regression results are shown for all variables in Tables 3 and 4
respectively. There are several points of interest in Table 3. First, there is a positive correlation
(0.302, p < 0.05) between the GE-or-match variable with the SCAR variable. This lends support
to Hypothesis 1 that changes in market expectations were more positive for firms announcing the
appointment of ex-GE executives as their CEOs than for firms announcing the appointment of
non-GE outsiders as their CEOs. Second, firms with poor performance over the previous five
years experienced increases in market expectations on the appointment of a new CEO regardless
of whether that CEO was from GE or the comparison group (-0.244, p < 0.01). Third, CEOs
from GE take positions in industries differing from their previous positions (at the three digit SIC
level) more frequently than do comparison CEOs (-0.228, p < 0.01). Finally, time was positively
20
The GE Paradox
related to departure firm performance suggesting that these firms performance improved between
the years of 1975 to 2002. This is not surprising given that GE is in the data set 39 times and its
performance improved consistently in the 20 year period under Jack Welch.
Of course showing support for hypothesis 1 based on zero-order correlations is not
sufficient. Consequently, we regressed the dependent variable SCARs on the GE-or-match
variable with all control variables included (see Model II, Table 4). Model II reports the effect of
being from GE or the matched group with the control variables in the model. The variable ex-GE
executive or match was significant and positive in agreement with Hypothesis 1 and our other
evidence from Tables 2 and 3. The control variable for performance of the announcing firm was
negative and significant at the p <.10 level in Model II, in agreement with prior studies (e.g.
Friedman & Singh, 1989). The beta coefficients reported in Table 4 are unstandardized. In
addition, we found no evidence of multicollinearity or heteroskedasticity in Model II. The
maximum Cook’s distance in the regression was .191, suggesting that outliers did not have a
high global impact upon the regression coefficients (Cohen, Cohen, West & Aiken, 2003).
Our time variable has the advantage of maintaining degrees of freedom while controlling
for time. Fixed effect dummy variables are also commonly used to control for time, although
they reduce degrees of freedom dramatically. To be thorough, we also ran the regression
analysis with fixed effect year dummy variables in place of our sequential time variable. The
results showed no material changes in either significance or coefficient signs.
Post Hoc Analyses: Real or Hype?
Although we did not hypothesize operating performance, market efficiency assumes
firms hiring CEOs from GE should experience higher operating performance than those hiring
21
The GE Paradox
from the general pool. At the same time, we would be unlikely to discern such an effect given
the large degree of noise in performance data, our small sample size, and low power. In addition,
it may take many years for reported operational financial performance to be affected by a change
in the CEO. We could only assess subsequent operational financial performance for three years.
Therefore, we conducted post hoc analyses of operating performance. We began with the
ex-GE and comparison group firms from our prior analysis. A search of Compustat and annual
reports for performance data two fiscal years following the succession announcement revealed
that performance data was unavailable for 4 firms headed by ex-GE executives and 7 comparison
firms. Lack of data was due to several reasons including mergers and bankruptcy. To increase
sample size, we selected 7 replacement firms from our list of potential comparison firms by
choosing the next closest firm in market cap compared with the ex-GE firm. We then gathered
data from Compustat to generate an ROA measure of operating performance for the year prior to
the succession announcement (t-1), as well as two years and three years after the announcement
(t+2, t+3). Our ROA measure was calculated by dividing income before taxes and depreciation
by the firm’s assets at the end of the prior year (Jacobsen, 1988; Jacobson, 1987). Not all firms
had sufficient data to calculate the ROA measure in all years.
We performed a series of regression analyses using the operating performance variable at
T+2 and T+3 time periods. The independent variable was a dummy for whether the firm was
headed by an ex-GE executive or not. Control variables for prior performance using the same
performance measure at time t-1 and our time control variable were included. Our results were
ambiguous. The GE-or-match variable was positive and marginally significant (P=.097) in the
equation predicting ROA performance at time T+2 with our time control variable. Substituting
time dummies for the time variable decreased significance to P=.113, but did not result in any
22
The GE Paradox
other material change. In models predicting ROA performance at time T+3, the GE-or-match
variable was not significant. Controls for prior performance were significant in each model.
The findings of our operating performance analysis are inconclusive. Although the
results at time T+2 are in agreement with the idea that firms with managers from GE perform
better than others, the parameter in question is only marginally significant. It is not significant in
any of the other analyses. Taken together, these results neither support nor falsify the existence
of the GE effect. The power of our analysis is very low. Cohen (1992) suggests a sample size of
more than 10 times ours would be required to obtain the benchmark 80% power in this analysis.
Because our analysis uses data that approximates a census of CEOs from GE over the study
period, a sufficiently large sample size is unobtainable in this analysis. In this regard,
inconclusive results on operating performance are a limitation of this study.
As discussed earlier, there is a great deal of hype relating to GE’s reputation for
developing talent, and this could affect the share price of firms hiring former GE executives as
their CEOs. However, if firms headed by ex-GE executives consistently under-performed the
market, it is likely that positive hype regarding ex-GE executive abilities would dissipate over
time. We examined the CARs over time to see if there was a discernable downward trend. No
evidence of such a trend was found. Furthermore, the time control variable was not significant in
the correlation matrix or in our multivariate regression analysis.
DISCUSSION
Our study finds support for the existence of the “GE effect.” New CEOs with GE
experience are expected by investors to lead their firms to outperform firms whose new CEOs do
not have GE experience. For the “GE effect” to be real, GE has to have a stronger capability to
23
The GE Paradox
identify, select, and develop general management talent than the average capability available in
the general manager talent pool. Further, this leadership talent attributable to GE must be
fungible to other firms.
Our event study analysis indicates the market expects ex-GE executives to improve the
performance of the firms acquiring their talents. In other words, on average, firms appointing
ex-GE executives to the CEO position receive additional net present value above the cost of
hiring these executives. This effect is not due to simply bringing in an outsider to replace an
existing CEO. The control group, composed of non-GE executives becoming CEO, showed, on
average, no abnormal returns relating to the appointment announcement. In other words, there
was no expectation of change in the firm’s performance due to the appointment of a CEO from
the comparison group. This is not to say that the CEOs appointed by these firms will not be able
to improve performance, but rather that the market does not expect them to generate greater
return given the costs to the firm of hiring and retaining them, than their predecessors.
Our results imply that GE has a pool of general management talent that is superior, on
average, to that available in the general labor market. If we assume that GE is effective at
identifying and retaining their best managers, then we can go as far as to say that GE’s “second
best” managerial talent is still superior to the talent available in the CEO labor market.
Our approach is a conservative one because it is likely to systematically underestimate
the GE effect. We do not control for the degree to which ex-GE executives are able to
appropriate the gains they bring to the firm. Arguably, executives command a large percentage,
if not all, of the gains they bring to the firm. The greater the percentage of gains ex-GE
executives appropriate, the smaller the expected rise in share price.
24
The GE Paradox
Revisiting the Question of Hype
Our study finds persistent positive abnormal returns for firms hiring CEOs from GE. We
interpret this as evidence that firms with CEOs from GE outperform their rivals. Although the
market may make mistakes, it seems hard to believe mistakes could be so persistent over time. If
firms managed by CEOs from GE prove to be unable to outperform rivals, then this shortfall in
comparison to performance expectations should become evident to the market over time.
Accordingly, abnormal returns should decline over time. Over the 20 years of this study they do
not. To believe the observed GE effect is hype one must also believe markets are highly
inefficient and do not learn.
Khurana (2002) argues that the market for CEO talent is irrational. He discusses how the
relative importance of different stakeholder groups involved in the CEO appointment decisions
has changed. Khurana asserts that these changes have led to overemphasis on charisma and
reputation in the hiring decision at the expense of concerns about the relevance of the potential
CEO’s experience with the business (or industry) in question and whether they might or might
not fit with the organizational culture. We find Khurana’s fieldwork interesting and insightful.
However, it should not be construed as conflicting with our work. Although Khurana suggests
appointments of high reputation individuals can lead to stock price increases but no improvement
in operational performance, he does not provide statistical evidence for these assertions. We are
not criticizing his work as the analysis in question is outside of the scope of his topic. However,
we feel that an irrational labor market does not imply an irrational financial market. Also, some
of the irrationally made decisions will in the end have good results. In other words, even if a
person was hired using an irrational process it does not preclude them from being good at the
position they were hired for. Large variations in market reactions to succession announcements
25
The GE Paradox
can be considered as investors’ interpretation of how well the process worked in finding the best
person for the job.
Untangling the GE Paradox
Our event study and regression analysis finds executives from GE are superior to those
from the general pool of management talent. This suggests that GE’s development process is
effective; however, it does not explain how GE benefits from apparently “over investing” in
management development. Management development is costly to GE; according to Hartley
(2007), GE is spending $1 billion US dollars per year on training in management and leadership.
This is the GE paradox - how can GE benefit from investing in non-firm specific managerial
capabilities held by individuals that can choose to leave the firm at anytime?
The Resource Based View states that firm performance can be traced to the existence of
valuable, rare, inimitable assets that the firm is organized to exploit (VRIO) (Barney, 2002).
Although criticized by Priem and Butler (2001), RBV remains one of the most prominent
theoretical lenses in strategic management. As Barney (1992) points out, RBV is concerned with
rareness or uniqueness. VRIO resources are outlying phenomenon and not identified by studying
mean values in a population of firms. Given GE's outlier status as a unique almost one-of-a kind
CEO talent generator, one would expect RBV to explain the "GE effect," but it fails to do so
when applied conventionally. However, as we discuss in more detail below with additional
interpretation of the meaning of "Organized," and with analysis that separates the process of
talent generation and its product, highly skilled managers, RBV theory can inform the "GE
effect."
26
The GE Paradox
One implicit assumption of RBV is that the firm has ownership or control of the VRIO
assets it invests in. Our research suggests that the market believes ex-GE executives are rare, but
that the value of their capabilities is not entirely GE specific. In addition, we know that these
individuals are free to leave GE. This reasoning suggests GE’s investments in managerial talent
may benefit the individual managers, but how does it benefit GE? In this sense, RBV would
appear to prescribe that GE should not make such investments.
The practitioner literature commonly holds the idea that investing in leadership
development leads to improved performance (Fulmer, Gibbs & Goldsmith, 2000). However, the
evidence is not conclusive, nor have the concrete mechanisms behind this phenomenon been
explained. In addition, numerous authors suggest that leadership ability is a major reason for
GE’s own success (Byrnes, 2000; Grant, 1995; Rowe, 2001; Sherman, 1995; Tichy and Cardwell
2002).
Different explanations for the relevance of leadership development in the GE context
have been offered. Thomas and Cheese (2005) suggest that GE understood there were increasing
returns to leadership in its environment. Further, they argue that changes made by GE to
leadership development in the 1980s were consistent with GE’s view that persistent change in
the environment could only be addressed by having large numbers of leaders at multiple levels of
the firm. In addition to developing leaders, Welch appears to have viewed the training portion of
executive development as a way to promote integration and sharing among different business
areas within GE (Craven, 2004; Tichy & Sherman, 1993). Because GE is so diverse this sharing
and integration might be especially valuable (but difficult to achieve). We believe these
arguments have merit; however, causality for the link between GE’s leadership development and
its performance remains unclear.
27
The GE Paradox
How can the paradox be resolved? A number of plausible theoretical arguments can
explain how GE may benefit from investing in managerial resources that it cannot control and
may leave the firm. Indeed, some of our arguments hinge on the notion that managers must
leave the firm for the development process to work.
As discussed earlier, we believe GE’s development system is socially and
organizationally complex, and inimitable. Additionally, GE appears to be well organized to
exploit the resource produced by the process - general management talent. These observations
lead us to consider the process itself to be VRIO and, therefore, a source of sustained competitive
advantage. The management talent developed by GE’s leadership development process,
however, may not be VRIO as it appears to be fungible to other firms. GE can benefit from the
capabilities of these executives while they remain at GE, providing GE a stream of ongoing
temporary competitive advantages from the process. Thus, the outcome of the process is not a
source of sustained competitive advantage; rather the process itself is the source of sustained
competitive advantage.
Others have proposed processes as a means for delivering sustained competitive
advantages (Ray, Barney & Muhanna, 2004). Literature points to additional examples of
processes that are a source of sustained competitive advantage and provide streams of temporary
competitive advantages. For example, Barney (1997) argues that although patents cannot be
considered a source of sustained competitive advantage (they may even induce imitation), the
research and development processes generating patents may be the source of sustained
competitive advantage. Lean-manufacturing processes could also be thought of as being
valuable, rare, and difficult to imitate (Barney, 1992). Lean manufacturing is a complex system
of processes that provides sustained competitive advantage by generating a stream of
28
The GE Paradox
improvements, over time, that are, individually, sources of temporary competitive advantage. In
agreement with this observation, Fujimoto (1999) noted that even though the Toyota Production
System, upon which lean-manufacturing is based, has received large amounts of attention for
years and many firms have attempted to replicate it, other firms have been unable to achieve
Toyota’s level, and Toyota continues to sustain its competitive advantage.
In the light of GE and the above examples, the “O” in VIRO may be worthy of additional
consideration and re-interpretation. Arguably, organizational processes within GE and Toyota
produce a flow of temporary competitive advantages. In GE’s case, this flow is comprised of
superior general management talent. This talent pool is the product of GE’s management
development process. It is this process and the flow of talent it generates that rejuvenates this
pool and is the basis of GE’s sustained competitive advantage. For this process to work
effectively it must produce more talent than GE can utilize.
The prominence of ex-GE talent in the CEO labor market is a byproduct of GE’s
managerial development process that requires flow in order to operate. Training, assignment,
and evaluation are three prominent, and frequently mentioned, features of the process. The firm
must create new openings in order to make new, more demanding (and thus developmental)
assignments possible for executives in the system. At the same time, GE needs to maintain flows
of managerial talent from the outside (at the bottom rung) to search for future talent. Both of
these require an upward flow in the organization. Because the firm has a hierarchical structure,
an upward flow of talent also requires an outward flow. Without outward flow, the inward flow
would slow or stop. In addition, new assignment opportunities would dwindle, and managers
would not be able to continue their rapid learning progress. Outward flow consists of three types
– retirement, dismissals, and high potential individuals leaving proactively to pursue outside
29
The GE Paradox
opportunities. Retirement numbers appear unlikely to provide a sufficient amount of flow to
keep the system operating. Dismissal of poor performers appears likely to focus primarily at the
middle and lower levels of the firm because only the individuals with strong performance are
selected for higher levels. The number of positions is very limited in the upper reaches of the
hierarchy. Very talented individuals may fail to obtain promotion because they are the second
best candidate, or even because their timing is bad and the more senior position will not open in
their potential tenure period. In these cases, external demand for ex-GE executives increases the
attractiveness of non-GE positions for these individuals. Although GE loses an individual when
one of these executives leaves, it maintains the upward flow because of the departure.
This logic suggests that the continued functioning of GE’s VRIO executive development
process requires, as a by-product, departure of some GE managers at different levels. Indeed, the
effectiveness of this flow is enhanced when GE’s program includes development of non-firm
specific capabilities in these managers because it makes these managers attractive outside of GE.
The transfer of general skills to executives at GE may also be considered a part of
employee compensation. In firms where job security is relatively low, employees are expected
to seek additional compensation to make up for increased job search costs (Hansmann, 1996).
Given GE’s up-or-out approach,1 job security is not high at GE (Grote, 2003). However,
capabilities gained while at GE make ex-GE employees more attractive on the labor market,
reducing the employment search costs for ex-GE managers. This argument suggests that
investments in employees’ general skills may reduce GE’s compensation costs.
Generalizeability to other firms
1
Interestingly, another firm known for its ‘up or out’ employment system, the consulting firm McKinsey, has been
presented as GE’s equal in grooming future CEO talent (Colvin, 1999).
30
The GE Paradox
Managerial development is a popular topic in the practitioner press. There are several
reports that rank firms for their ability or track record in managerial development. Consequently,
we identified practitioner literature presenting surveys on the best firms to hire managers from as
well as practitioner research listing what firms CEOs had been hired from (Donlon, 2006;
Donlon, 2007; Effron, Greenslade & Salob, 2005; Gandossy & Effron, 2004; Fredman, 2002;
Groysberg et al., 2006; Hajim, 2007; Holstein, 2005; Morrison, 1981). Because the
methodologies used in these sources are not clearly explained, the results may not be directly
comparable. We did find that GE was the only firm to be named in every survey or analysis we
identified.
We believe there are two reasons for GE’s consistently high rankings: one is the
suitability of such a process to other firms, and the other is the difficulty of developing such a
system. As a diversified firm operating in many industries, GE needs more general managers
than single industry firms of the same size. Such a system would naturally be less attractive to a
firm with lower managerial requirements because its relative cost per manager would increase;
and efficiency would decrease. In addition GE’s larger number of managerial assignment
opportunities makes the system more effective. One way GE’s system develops talent is through
ever more challenging assignments. Fewer assignment opportunities inside the firm result in a
lower development capability. This discussion suggests the structure and diversification of the
firm may impact the attractiveness and the ability to develop a system like GE’s.
We also believe development of such a system may take longer and require more
managerial attention than is commonly thought. Leadership development is an important topic
in the practitioner press. We often read about CEOs making pledges to develop managers.
However, CEO turnover is rapid. With each new CEO, priorities change. Priorities also change
31
The GE Paradox
when CEOs face financial difficulties. We would surmise that managerial development is one of
the items on a CEO’s to do list that is easy to ignore or cut. In contrast, GE has made managerial
development a focus over time, through the lengthy tenures of multiple CEOs.
Even with a large amount of managerial attention, there is still reason to believe that a
system similar to GE’s cannot be easily replicated. As we have discussed above, GE’s system is
socially complex, and although certain pieces of it are well known, it is not well understood in its
entirety. Simply implementing some of its well-known elements is unlikely to result in a system
capable of functioning like GE’s.
In the light of this discussion, GE’s system may be generalizeable to other firms on a
theoretical level, however most managers may find it too time consuming, costly, or unsuitable
for their particular firms. However, given the aspects of the system discussed above, similar
systems may be identified in future research of talent developing firms outside of North America.
In particular, traditional large Japanese conglomerates typically exhibit highly developed,
socially complex HR evaluation and assignment systems that have become socially complex and
ingrained over long periods of time. One difficulty with direct comparison between GE and such
international firms, however, is the different cultural values attached to managerial outcomes.
Limitations and Future Research
This study has a number of limitations. Although we present evidence that managers
from GE have superior managerial abilities compared to those from the general pool of
managerial talent, the exact nature of this advantage is unclear. GE has been long touted as one
of the most admired U.S. firms (Fox, 2002), and as a leader in the application of cutting edge
management techniques and management philosophy (Mintzberg, 1994; Nohria et al, 2002;
32
The GE Paradox
Slater, 1993). This suggests firms hiring ex-GE executives can benefit not only from the
leadership abilities of the individual, but they may also gain the opportunity to imitate GE
management techniques (Lieberman & Asaba, 2006). However, we are unable to discern
whether the superiority of managers from GE relates to concrete managerial techniques or to
more general managerial experience gained over time. Comparison of how CEOs from GE and
from the general talent pool manage their firms could shed light on these questions, however it is
beyond the scope of this study.
Our analysis suggests GE executive talent is fungible to other firms. However, we are
unable to determine how much this transferability depends upon the environment, and in what
environments it is more or less transferrable. We believe the market consensus of ‘fit’ between
the executive and announcing firm is a source of unexplained variance in our multivariate
analysis. Although our analysis controls for executives changing industries, its inability to
consider other aspects of ‘fit’ represent a limitation to this research.
We suggest GE employees may be willing to trade off some financial compensation for
their increased attractiveness on the job market gained through being a member of GE’s
leadership development process. Whether or not GE realizes such compensation savings is a
question of interest but is beyond the scope of this study.
As we discuss above, our inability to increase power in our operational performance
analysis is a limitation to this research. Unfortunately, because our sample approaches being a
population of managers who left GE to become CEOs at other firms, we are unable to increase
our sample size and resolve the power issue.
33
The GE Paradox
CONCLUSION
This study tested and found evidence for the “GE effect.” The results of our stock price
event study support the proposition that GE has a leadership development capability superior to
other firms and that the managerial talent produced by this system is fungible to other firms. The
“GE effect” has been a topic of conjecture for some time in the practitioner literature (e.g.,
Colvin, 1999; Kratz, 2005). This study contributes to the academic literature by rigorously
testing for, and finding this effect.
Neither RBV nor TCE predicts or explains the GE paradox; that is, how or why GE
makes investments in non-firm specific managerial capabilities that it does not own or control.
We theorized that maintaining a flow of managers both up (inside the firm) and out (of the firm)
helps GE’s talent development process to operate effectively. Turnover in the managerial ranks
is a requirement for the system to function and actually strengthens the leader development
system. When a top manager leaves GE to take a position at another firm, GE loses the talent of
that individual, but GE’s leadership development system benefits from the continuation of
upward momentum internally, as well as from the reputation GE gains externally2. The process
is a source of sustained competitive advantage, providing a stream of managerial talent where
each manager has the potential to be a source of temporary competitive advantage (TCA) - a
source of TCA because the talent of the individual manager is fungible to other firms.
Finally, we believe that our analyses, results, and discussion contribute to a deeper
understanding of the RBV of the firm and a finer understanding of one of GE’s sources of
sustained competitive advantages versus its sources of temporary competitive advantage. Our
study also contributes to understanding why the study of outliers enriches our comprehension of
the resource based view of the firm.
2
We thank an anonymous reviewer for this insight.
34
The GE Paradox
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The GE Paradox
APPENDIX: Names and Dates of CEO Announcements
Table A-1: Ex-GE CEO Appointment Announcements
40
The GE Paradox
Table A-2: Matching CEO Appointment Announcements
41
The GE Paradox
TABLE 1
Comparison of Industries in ex-GE Group and Matching Firm Group
SIC Division
Mining
Construction
Manufacturing
Transportation, Communications, Electric, Gas
and Sanitary Services
Wholesale Trade
Retail Trade
Finance, Insurance, and Real Estate
Services
Total
ex-GE
0
1
27
Matching
1
0
18
2
7
2
1
2
4
39
1
2
2
8
39
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The GE Paradox
TABLE 2
Market Adjusted Returns for CEO Announcements over 3-Day Event Window (Equally Weighted Index)
Cumulative Abnormal Returns
N
Ex-GE Executives
39
Matched Executives
39
*** p < .001, two-tailed test.
Min
Max
Mean
St. Dev.
+ / - Ratio
-8.20%
-23.60%
30.20%
26.00%
3.92%
-0.61%
0.076
0.089
25:14
17:22
Patell ZScore
5.946***
-0.534
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The GE Paradox
TABLE 3
Correlation Table
no. Variable Name
Mean
S.D.
1 SCAR
0.432
2 GE_Or_Match
0.500
3 Announcement firm performance (a)
1.456
4 Departure firm performance (a)
1.425
5 Industry change
0.192
6 Time
9.205
Notes: (a) transformed. *p<.05; **p<.01; two-tailed tests
1.669
0.503
1.844
0.886
0.397
4.241
1
1
.302**
-.244*
.062
.019
-.004
Pearson Correlations
2
3
4
1
-.149
.146
-.228*
.000
1
.126
.096
.172
1
-.041
.389**
5
1
-.147
n = 78
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The GE Paradox
TABLE 4
Regression Models
Dependent Variable: SCAR
N = 78
Variable name
Independent Variable
GE_or_Match
B
Model I
S.E.
Sig.
B
Model II
S.E.
Sig.
1.000
.363
.007
.956
.380
.014
-.201
.073
.472
.014
.102
.227
.479
.048
.053
.749
.327
.772
Control Variables
Announcement firm performance
Departure firm performance
Industry change
Time
R-Squared
.091
Adjusted R-Squared
.079
Note: The beta coefficients are unstandardized.
.145
.086
45