The case for humble expectations: CEO humility and market performance

Abstract

Research Summary In this study, we investigate the effect of chief executive officer (CEO) humility on firm's market performance. We argue and find that firms with more humble CEOs will have better market performance but not because they actually perform better but, rather, because they benefit from an expectation discount in the market. Specifically, we show that, all else equal, financial analysts announce lower earnings per share expectations for firms with more humble CEOs. This expectation discount sets the stage for those firms to meet or beat analysts' expectations resulting in improved market performance for firms with humble CEOs. We find support for our ideas with a sample of Standard & Poor's (S&P) 500 CEOs, operationalizing CEO humility with a videometric technique. Managerial Summary In this study, we investigate the effect of CEO humility on firm's market performance. We show that firms with more humble CEOs will outperform other firms in the market because financial analysts tend to set lower market expectations for firms with more humble CEOs increasing the probability that they will outperform those expectations. Rather counterintuitively, these firms do not have better market performance because they perform better but because they face lower expectations. Ultimately, the study demonstrates the importance of CEO characteristics for external evaluations and perceptions about the firm with significant effects on investment performance.

Metacritiques of Upper Echelons Theory: Verdicts and Recommendations for Future Research

“…One example of a study that validated a new measurement technique is that of Petrenko, Aime, Ridge, and Hill (2016). They went through an extensive validation process to support the use of a “videometric” approach to examine CEO narcissism and its influence on a firm’s engagement in corporate social responsibility (for additional refinement of this validation process, see Petrenko, O. V., Aime, F., Recendes, T., & Chandler, 2019). Building on previous work (e.g., Gamache, McNamara, Mannor, & Johnson, 2015; Malhotra, Morgan, & Zhu, 2018) that used literary analysis as a means of unobtrusively assessing executive characteristics, Harrison and colleagues (2019) conducted an extensive validation of executive personality traits (i.e., the Big Five) using machine-learning algorithms.…”

CEO Machiavellianism and Strategic Alliances in Family Firms

“…Certo et al, 2016). Consistent with prior research (Petrenko et al, 2019; Westphal & Bednar, 2005), we conducted a Kolmogorov–Smirnov two-sample test (Siegel & Castellan, 1988) to verify the representativeness of our final sample. First, we downloaded data from Compustat on all firms in the S&P 500 stock index between 2000 and 2016.…”

“…Furthermore, when data were missing from any of the listed databases, we used a firm’s 10-K reports to attain such data when available. Last, CEO Machiavellianism data were collected utilizing a videometric technique that used third-party observer ratings of CEOs from publicly accessible videos (Hill et al, 2019; Petrenko et al, 2019).…”

Can CEO’s Humble Leadership Behavior Really Improve Enterprise Performance and Sustainability? A Case Study of Chinese Start-Up Companies

“…In management practice, the leadership behavior of chief executive officers (CEOs) plays a decisive role for enterprises in achieving a high performance and development since they generally handle the daily affairs of an enterprise on behalf of the board of directors. Recent studies have manifested that not only CEO's demographic characteristics including gender, age, and education background but also the CEO's psychological traits such as overconfident personality, humility, and optimism have direct or indirect effects on decision-making, which would further influence the firm's sustainable performance [2][3][4]. Furthermore, humility is considered as the one of virtues that effectively facilitate the transition to a more sustainable economic mode to face complex environmental and social challenges [5].…”

“…Moreover, humble leadership behavior, which is a "bottom-up" leadership style, is regarded as an ability to motivate employees to be self-driven, self-managing, and collectively assume team responsibility. Therefore, humble CEOs are considered as cooperative, empowering, and virtuous leaders, and can make deep changes in operations and organizational culture [4,48]. Overall, CEO's humility not only is a moral habit but also focuses on cognitive/behavioral skills rooted in a deep understanding of a practice.…”