Leadership

How
Affects a CEO’s
Their Personality
Company’s Stock
Price
by Joseph S. Harrison, Gary R. Thurgood, Steven Boivie, and Michael D. Pfarrer
October 09, 2019
William Andrew/Getty Images

Summary.   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... more
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.

JH
Joseph S. Harrison (j.s.harrison@tcu.edu) is an
assistant professor in the Neeley School of
Business at Texas Christian University. He
received his Ph.D. in strategic management from
Texas A&M University.

GT
Gary R. Thurgood is an Assistant Professor in the
Management Department in the Huntsman School
of Business at Utah State University. He received
his Ph.D. in management from Texas A&M
University. His research focuses on personality,
leadership, job design, and employee motivation.

SB
Steven Boivie is an associate professor in the
Mays Business School at Texas A&M University.
His research has been published in the Academy of
Management Journal, Strategic Management
Journal, Organization Science, Academy of
Management Annals, and Journal of Management.

MP
Michael D. Pfarrer is a Professor of Management
in the Terry College of Business at the University
of Georgia. He received his Ph.D. from the
University of Maryland. His research focuses on
firm reputation and celebrity, impression and
crisis management, media and corporate
communications, and the role of business in
society.