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Can Starting Out in an Economic Bust Hurt a CFO’s Career?

Boom or bust: Which environment your career began in can shape your career.

That’s according to MIT Sloan researchers Antoinette Schoar and Luo Zuo. In their working paper, “Shaped by Booms and Busts: How the Economy Impacts CEO Careers and Management Style,” Schoar and Zuo write that the CEOs who enter the labor market during an economic downturn tend to enjoy less success than those begin their careers in a buoyant economy. Their findings, though specific to CEOs, have similar implications for CFOs. A summary of the working paper appears in the latest Strategy+Business.

Chief executives who started working during a recession tended to be recession-minded, and while they often rose to the top more quickly, they also ran smaller firms and earned less compensation. The lower pay reflected that the CEOs’ achievements and successes were less visible to those outside the company, according to the study, thus hampering the CEOs’ ability to negotiate for better terms.

On the other hand, “managers who start in boom times will have positive results [throughout their career, which they don’t need to broadcast] even if they did not personally contribute a lot to the success of the firm,” the authors posit.

Recession-minded CEOs also tended to have a more conservative management style, spending less on capital investments and research and development, the authors write.

Since the finance chief, after the CEO, is most responsible for a firm’s financial performance, would similar career patterns apply to the CFO population? Probably, says Schoar. 

“I would believe that the forces we are documenting for the CEOs should be similar for CFOs,” Schoar responds to an e-mail query. “In prior research I do find that CEOs and CFOs both play an important role in the decisions and performance of their firms and that these decisions for both groups of executives are affected by their educational background—e.g. whether they hold an MBA or even the business school they attended. [Therefore] I would believe that something similar is true in the case of the effect of recessions.” (The prior research was a paper titled “Managing with Style: The Effect of Managers on Corporate Policy,” written jointly with Marianne Bertrand in the November 2003 Quarterly Journal of Economics.)

Finally, a note for mid-level finance managers: Schoar and Zuo also find that recession-minded CEOs’ company stock returns were about 3.2% lower than boom-time chiefs. And they also appear to engage more in earnings management. A “conservative ‘tone at the top’ may put more pressure on mid-level financial-reporting managers to manage earnings to meet or beat earnings targets, or to avoid debt-covenant violations,” they write.

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