Many CEOs seem unconcerned with managing external perceptions. But how does this affect the value of their firms? As the face of the company to outsiders, CEOs’ observable tendencies (for example, how they interact with media or equity analysts) could significantly influence investors’ perceptions of the firm and therefore its value. And researchers found that CEOs’ observed personality traits do have important consequences for their firms’ stock volatility (i.e., risk) and shareholder returns.
CEOs represent the face of their companies. Although one may expect this public role to temper what CEOs do and say, there are many examples of highly visible CEOs behaving eccentrically in public. For example, Paypal’s Peter Thiel has championed investing in human immortality and Tesla’s Elon Musk frequently talks about nuking Mars and even received attention last year for smoking marijuana on a podcast with comedian Joe Rogan.
Many CEOs seem unconcerned with managing external perceptions. But how does this affect the value of their firms?
This question led us to conduct a study, forthcoming in the Academy of Management Journal, in which we investigated how the market reacts to CEOs’ personalities. Our broad hypothesis was that, as the face of the company to outsiders, CEOs’ observable tendencies (for example, how they interact with media or equity analysts) could significantly influence investors’ perceptions of the firm and therefore its value. And we found that CEOs’ observed personality traits do have important consequences for their firms’ stock volatility (i.e., risk) and shareholder returns.
In the study, we focused on three of the so-called “Big Five” personality traits, which we believed would show up in CEOs’ behavior and therefore be seen by investors. These traits were conscientiousness, or the tendency to be cautious, dependable, and achievement oriented; neuroticism, or the tendency to exhibit emotional instability via higher levels of stress, anxiety, and hostility, as well as impulsiveness and difficultly completing tasks; and extroversion, or the tendency to be outgoing and sociable as well as ambitious, dominant, and excitement-seeking. The other two traits are openness to experience and agreeableness, which we felt wouldn’t be as observable to outsiders.
We developed a machine learning algorithm to predict the Big Five personality traits of S&P 1500 CEOs. We trained the algorithm by comparing personality scores of about 200 S&P 1500 CEOs (scored by trained psychology Ph.D. students who watched video clips of the CEOs) to what the CEOs said during the Q&A portion of quarterly earnings calls with equity analysts. We then applied the algorithm to a larger set of transcripts to predict personality for more than 3,000 CEOs of S&P 1500 firms between 1993 and 2015. We also controlled for various characteristics of the CEO, firm, and industry that may have confounding effects on our results.
Using this method, we found that CEOs’ observed levels of conscientiousness, neuroticism, and extroversion significantly affected their firms’ stock volatility as well as the likelihood that increasing risk would result in higher returns to shareholders. Firms of more conscientious CEOs tended to have lower levels of stock volatility, but were able to generate higher stock returns at increasing levels of risk. In contrast, firms of more neurotic and extroverted CEOs tended to experience higher levels of stock volatility, but were less able to translate this high risk into higher shareholder returns. In fact, for the firms of highly extroverted CEOs, there was a negative relationship between stock risk and shareholder returns.
As with any archival research, it would be difficult to make definitive claims about causality based on our results. Investors are likely to take a number of factors besides a CEO’s observed tendencies into account when evaluating a given firm. But the associations are striking. In our sample, we found the following effects:
- More conscientious (relative to less conscientious) CEOs’ firms experienced 2.59% lower stock risk, on average, and increasing risk resulted in a 3.83% increase in returns for their firms, whereas risk decreased returns by 1.70% in less conscientious CEOs’ firms.
- More neurotic (relative to more emotionally stable) CEOs’ firms experienced 2.04% higher stock risk, on average, and increasing risk did not yield any returns in their firms, whereas it increased returns by 2.68% in more emotionally stable CEOs’ firms.
- More extroverted (relative to more introverted) CEOs’ firms experienced 2.40% higher stock risk, on average, and increasing risk reduced returns by 3.30% in their firms, whereas it increased returns by 5.43% in more introverted CEOs’ firms.
In financial markets, where every percentage point matters, the fact that any given trait on its own is associated with such a bump could be very meaningful for firms and their investors. For instance, for the average firm in our sample, with a market cap of about $7 billion, even a 2 -5% change in returns is associated with about $140 million to $350 million in value created or destroyed for the firm.
Our findings suggest a few areas where managers and boards could take notice. First, despite increasing rhetoric in the business community that leaders need to be “authentic,” our findings suggest that there is still wisdom in managing impressions for CEOs. To some extent, CEOs’ eccentricity may be an aspect of their competitive edge, but failing to manage impressions may be detrimental for value creation over time. In the case of the Elon Musk, who was not in our sample of CEOs but has publicly admitted to being impulsive – one type of neurotic tendency – his company Tesla has experienced high volatility over the past several years with some of the highest implied volatility of any stock reported a few months ago. Tesla has also struggled to generate returns for shareholders in the past few years, with losses in five of the last eight quarters. Although these trends likely result from a combination of factors, the astute manager could take Musk’s public antics as an example of where “authenticity” can change from benefitting the firm to potentially destroying value. Boards would do well to ensure managers take appropriate measures to self-regulate in public.
Second, from a CEO selection standpoint, boards should be cognizant of personality as a factor that may influence an executive’s potential effectiveness as the face of the company. Certainly, boards should place high value on conscientiousness, and it probably goes without saying that they should avoid highly neurotic individuals when deciding on a new CEO. But it’s also important to pay attention to extroverted candidates. In leadership research, it is well established that extraverts tend to be promoted to higher levels in the organization more frequently and more quickly than introverts. It’s not clear if this is because extroverts tend to be better leaders, or if they are just perceived to be better leaders because of their charisma. Our findings suggest that more extroverted CEOs may actually be less effective at managing risk and creating value than their more introverted counterparts. Thus, when selecting a new CEO, boards should also be wary of determining a candidate’s potential effectiveness based on his or her extroverted tendencies.
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