Friday, February 13, 2015

Harvard at Top of IPO Class: Bad Statistics

Harvard at Top of IPO Class:  Bad Statistics

Seven companies led by Harvard graduates went public last year and produced an average return of 74%, versus 9.6% for the average IPO.  Columbia University, Stanford University, Texas Tech University, and University of North Carolina produced three CEOs apiece who took their companies public.[1] This information was released by Equilar, an executive compensation specialist and was dutifully picked up by the media.  The news stories attempt to build a link between Harvard-trained executives and their success in taking companies public.  This particular story exemplifies many of the worst tendencies in financial reporting (sports reporting makes the same mistakes).

For starters, the sample size is ridiculously small.  Equilar would like us to draw all sorts of conclusions from only seven data points.  It’s like a reporter seeing a batter go three for four in a baseball game and then writing a story that he’s just seen a future hall-of-fame batter.  Harvard graduates may indeed have a leg up when it comes to IPOs, but the Equilar press release provides scant evidence. 

Someone intent on demeaning the role of Harvard in IPOs could have misused statistics to point out that 98% of all IPOs were led by CEOs who didn’t go to Harvard.  According to Dealogic, 293 companies went public least year, and only seven were led by Harvard graduates. 

While the average return of 74% looks impressive, it encompasses a very short period of time.  The performance of a company’s stock over twelve months or less says little about its superiority relative to other companies.  Equilar used this statistic because it is easy to calculate, readily available, and makes a point that is good for its executive recruiting business.  Sports broadcasters commit the same sin over and over again.

By the way, you could also conclude (albeit without sufficient evidence) that Harvard-led companies grossly undervalued their stock when they went public.  In other words, they cheated their existing shareholders by selling the stock too cheaply to the public.  If they’d done a better job pricing their respective deals, the price wouldn’t have skyrocketed in the last few months.

Even if we had a more robust dataset and more meaningful performance statistics, we still couldn’t have any meaningful evidence about cause and effect.  The CEO is only one small factor in the success of a company.  While the CEO often gets a great of the credit (or blame), all sorts of other internal and external factors are far more important in determining whether a company goes public and then performs well on the stock market. 

Equilar’s press release also ignores the varying roles CEOs play in emerging companies.  While some CEOs are founders and entrepreneurs, others are brought in for their managerial and/or P.R. skills.  In my experience, the folks who created the company are relegated to secondary roles.  Harvard or Wharton MBAs are hired just before an IPO because they are expert at talking to potential buyers of the stock, such as hedge fund managers.   I suspect that Equilar makes a lot of money convincing private companies that they need to hire Harvard graduates for millions of dollars.  Their pitch book will probably include all the press stories lauding the virtues of Harvard grads.


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