We know that managerial traits help explain firm performance, but we don’t know whether the cultural heritage of those managers has a role in shaping performance through their behaviour. This column uses a novel dataset of bank CEO ancestry to argue that descendants of recent immigrants outperform their peers when competition is high. Banks led by CEOs whose cultural heritage emphasises restraint, group-mindedness, and long-term orientation are safer, more cost efficient, and are associated with more cautious acquisitions.
They do a lot of research to figure the ancestry:
To identify this cultural heritage, we hand-collected data on the country of origin of a CEO’s ancestors from Ancestry.com, the world’s largest genealogy database, which has access to almost 17 billion family histories. We trace the CEOs’ ancestors by using the name, birthplace, and birth year to identify parents, and then doing the same for parents to identify grandparents. This allows us to map a CEO’s family tree for up to six generations. We are able to track a CEO’s ancestral country, and how many generations ago ancestors moved to the US. As an example, James Dimon, the CEO of JP Morgan, is a third-generation descendant of Greek immigrants to the US.
We must be careful with causal inferences. Identifying a causal effect of CEO cultural heritage on firm performance is challenging because CEOs are often selected by firms because of their characteristics. We rely on an exogenous shock that disrupts the matching of CEOs to firms to isolate CEO-specific effects from these firm-specific effects.
Where ancestors immigrated from seems to matter:
Further, we find that not all recent descendants of immigrants outperform under pressure. The effect varies by the country of origin of a CEO’s ancestors. Our findings imply that CEOs whose ancestors were from Germany, Italy, Poland and Russia are associated with better bank performance under competitive pressures. CEOs with British or Irish ancestors do not display different performance from the rest of the sample. Figure 1 shows the additional return on assets associated with CEOs, by the country that a CEO’s ancestors were from. The red bars indicate that the effect is statistically significant different from zero (5% probability). The blue bars indicate that the effect is not statistically significant.
Figure 1 CEO country of origin and competitive performance
Does nature or nurture better explain our results? Our results suggest that a CEO’s cultural heritage explains competitive performance more than we would expect from the genetic differences between people in their countries of origin. Instead, we can trace the outperformance of CEOs to specific cultural values. CEOs whose cultural heritage is characterised by lower individualism, higher uncertainty avoidance and higher restraint are more likely to outperform under pressure. Alternative interpretations such as CEO ability, the geographical characteristics of the area where banks are chartered, or the institutional and economic factors outside the US at the time when the CEO’s ancestors emigrated to not explain this variation.
A CEO’s cultural heritage seems to affect performance through three bank policy choices: cost-efficiency, credit losses, and acquisition performance. That is, we find that CEOs with ancestors from a high-restraint cultural backgrounds boost profitability by being more cost-efficient, while CEOs from a cultural background that is more uncertainty-avoiding are associated with lower credit losses and better acquisition performance.