The Value of Steve Jobs

18 January 2011 at 11:31 pm 9 comments

| Peter Klein |

As you have likely heard, Steve Jobs is taking an indeterminate leave of absence from Apple to deal with his continuing health problems. How will this affect Apple? How important is one person — albeit the founder and CEO — to a diversified multinational company with tens of thousands of employees? Apple’s stock slipped slightly on the news of Jobs’ leave (down 2.3 percent today, the first trading day after the announcement), but Jobs’s health problems are well known and Apple’s stock price presumably already included a discount reflecting the possibility he’d step down. To estimate the value of a particular employee to the firm in this way, we need an unanticipated departure, one that isn’t a response to poor performance and isn’t expected in advance.

Sure, enough, there’s an app for that — I mean, there’s a literature on that. An influential 1985 paper by Bruce Johnson, Robert Magee, Nandu Nagarajan, and Harry Newman looked at stock-price reactions to CEO deaths by plane crash, finding positive announcement effects for founders and negative announcement effects for professional managers. (One way to handle the founder-succession problem!) Macabre, I know, but nonetheless a clever way to deal with endogeneity. Naturally, this paper spawned a follow-up literature. Rather than cite the papers myself, I’ll just block quote a paper by Bang Dang Nguyen and Kasper Meisner Nielsen presented at last week’s AEA meeting, “What Death Can Tell: Are Executives Paid for Their Contributions to Firm Value?” and you can chase down the references on your own:

Our paper draws inspiration from a growing body of literature that uses sudden deaths to overcome the identification issues related to the contribution of top executives to shareholder value. In a seminal paper, Johnson et al. (1985) use sudden deaths of 53 executives to estimate the value of executives’ continued employment. They find positive stock price reaction to the death of founder-CEOs and negative reaction to that of professional CEOs. Later papers have applied this approach to examine different roles of CEOs and chairmen (Worrell et al., 1986), the effect of inside block ownership (Slovin and Sushka, 1993), and the impact of managerial entrenchment on firm value (Borokhovich et al., 2006; and Salas, 2010, respectively). Other studies (Roberts, 1990; Fisman, 2001; and Faccio and Parsley, 2009) have used sudden deaths (or rumors of poor health) of politicians to estimate the value of having a politically connected CEO. Bennedsen, Pérez-González, and Wolfenzon (2007) study the event of the deaths of CEOs, and of their relatives, and show that CEOs are instrumental for corporate performance. More recently, Nguyen and Nielsen (2009) use sudden deaths to estimate the value of independent directors.

I don’t know if any of these papers study unanticipated medical leaves, as well as deaths, but that would be a sensible extension.

Of course, studying the value added from the founder’s contribution to a mature company tells us little about the value of founders per se. But this raises a more general question about “opportunities” as conceived in the entrepreneurship literature. If opportunities exist, objectively, waiting to be discovered, then it’s reasonable to question the value of a particular discoverer. If Columbus (or Vespucci, or Leif Eiríksson, or whoever historians favor these days) hadn’t discovered America, somebody else would have come along a bit later and done the same thing. I think this view downplays the roles of subjectivism and uncertainty, which is one of the reasons I reject the opportunity-discovery perspective.

(Thanks to Peter Lewin for inspiring this post.)

Entry filed under: - Klein -, Entrepreneurship, Methods/Methodology/Theory of Science, Recommended Reading, Strategic Management.

Guilt by Association? Unrelated Diversification, circa 1971

9 Comments Add your own

  • 1. Randy  |  19 January 2011 at 12:03 am

    There will be an interesting natural laboratory experiment on the value of Jobs when markets open. Earnings for the last quarter were reported up 78% — much more than the market expected — after share trading closed down 2.3% during today’s trading. Can higher earnings trump the loss of charismatic leadership?

  • 2. Peter Klein  |  19 January 2011 at 12:12 am

    That’s why we need a larger N, so we can hold things like earnings announcements constant. Unfortunately, the CEOs of other companies will not likely cooperate. (IRB approval might be tricky as well.)

  • 3. Peter Lewin  |  19 January 2011 at 1:17 am

    “If opportunities exist, objectively, waiting to be discovered, then it’s reasonable to question the value of a particular discoverer.”

    Yes, and also, once discovered, the opportunity is available to all, and the discoverer can disappear – clearly not the case for a person like Jobs. We have to stretch and say that he is someone who continues to “discover” opportunities that enhance the value of company, rather, than, more appealingly, someone who “creates” value on an ongoing basis. To do so would also presume that the entrepreneur must be an “owner” of the resource-inputs into the value he creates (else no creation) – an insight of professor whose name escapes me :-).

  • 4. Michael D. Thomas  |  19 January 2011 at 11:17 am

    There seems to be a culture created by the CEO that is both independent (could form around anyone) and dependent (is historically associated with one person). This seems like a type of myth building around the entrepreneur that creates and overlapping and heterogeneous causal connection between the person and the culture.

    In thinking outside of the box on this I can determine a taxonomy of athletic coaches much more readily than I can CEOs, but maybe there is some overlap. The program builder (associated with new ascendancy and growth), the savior (stops a slide), the captain (consistent high performance but never achieving high rates of growth).

    I am very interested in this. Thank you for posting.

  • 5. Stephan Kinsella  |  19 January 2011 at 4:09 pm

    Peter, typo: in “(Thanks to Peter Lewin for inspiring this post.)” “this” should go before “inspiring”.

  • 6. Brijendra Dharampuria  |  21 January 2011 at 2:23 am

    Steve Jobs’s health problem is a subject of discuss among its share holders and companies employees. Everyone is guessing the effect of absence of Jobs from Apple. According to me Steve is still needed for Apple to make help in touching new height of success in business. Apple has been prepared it forthcoming business strategies that may little effect but Jobs value never be less in Apple.

  • 7. gabrielrossman  |  21 January 2011 at 3:42 pm

    azoulay et al used a similar strategy for identifying the effects of network spillovers in academia.

  • 8. Peter Klein  |  21 January 2011 at 3:44 pm

    Thanks, good link! But how do they know the deaths of these star scientists were really exogenous? (No offense, coauthors.)

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