If your CEO is neurotic, do not expect return on investmentChristian Fernsby ▼ | October 14, 2019
CEOs represent the face of their companies.
World Many CEOs seem unconcerned with managing external perceptions
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," wrote researchers.
Key findings were very interesting:
- 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.
"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."
"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." ■