CIO Educational Background, Strategic Positioning, and Stock Performance

Abstract

Because the contribution of the Chief information Officer (CIO) in many strategic IT initiatives is non-routine and difficult to evaluate accurately over a short time frame, management control theory suggests clan control for CIOs as monitoring behavior or outcome is difficult (Ouchi 1980). Accordingly, the control systems are best designed around hiring a CIO with the right education, background and knowledge, which make it more likely that the CIO's values and decisions are well aligned with the firm’s strategic interests and motivate the CIO to display desired performance. Chatterjee, Richardson and Zmud (2001) documented that during the 1987-1998 period, the market positively reacted to announcements of appointments to newly-created CIO positions because those were perceive as a signal of improved IT management skills, enhanced IT capabilities, and subsequent firm performance. While the concept of the CIO was novel in the late 1980s and 1990s, CIO positions have dramatically gained prominence in today’s business world. Accordingly, announcements of CIO appointments are quite common nowadays, making them no longer news for investors to provoke strong market reaction. In contrast, we argue that the alignment of CIO appointments is necessary to elicit strong market reactions. Extending the view that a firm’s strategic positioning (differentiation or cost leadership) is a primary determinant of its CIO reporting structure (Banker, Hu, Pavlou and Luftman 2011), we introduce the notion that CIO appointments must be contingent on the firm’s strategic positioning. Inspired by a recent debate between Bill Gates and Steve Jobs regarding the implications of different educational background (technical versus non-technical), we focus on the dynamics between the CIO’s educational background and the firm’s strategic positioning. Specifically, we posit that differentiators are more likely to hire a CIO with technical background, while cost leaders are more likely to hire a CIO with a non-technical background. Most important, we hypothesize that firms that align their CIO's educational background with their strategic positioning (specially, differentiators appointing technical CIOs and cost leaders appointing non-technical CIOs) will have superior stock performance. Results from analyzing data drawn from Nasdaq100 index and S&P500 index strongly support these propositions, emphasizing the CIO’s educational background as a major factor for firms to consider when appointing CIOs.