The Effect of CEO Extraversion on Analyst Forecasts: Stereotypes and Similarity Bias

Abstract

In an experiment with professional analysts, we study their reliance on CEO personality information when producing financial forecasts. Drawing on social cognition research, we suggest analysts apply a stereotyping heuristic, believing that extraverted CEOs are more successful. The between‐subjects results with CEO extraversion as treatment variable confirm that analysts issue more favorable forecasts (earnings per share, long‐term earnings growth, and target price) for firms led by extraverted CEOs. Increased forecast uncertainty leads to even stronger stereotyping. Additionally, personality similarity between analysts and CEOs has a large effect on financial forecasts. Analysts issue more positive forecasts for CEOs similar to themselves.

Ceo Extraversion and Capital Structure Decisions: The Role of Firm Dynamics, Product Market Competition, and Financial Crisis

“…Thus, it is predominantly the first trait perceived by stakeholders at the start of an interaction (Koole, Dijksterhuis, and Van Knippenberg 2001). Extraversion is a stereotypical characteristic of CEOs and usually reinforces the idea that the qualities of extraverted CEOs are greater relative to those of less extraverted CEOs (Becker, Medjedovic, and Merkle 2019). For instance, an online survey comprising more than 1,500 senior business leaders reports that 65% regard introversion as an obstacle to career development whereas only 6% recognize introverted CEOs as superior to their extraverted counterparts in terms of leadership ability.…”

“…For instance, an online survey comprising more than 1,500 senior business leaders reports that 65% regard introversion as an obstacle to career development whereas only 6% recognize introverted CEOs as superior to their extraverted counterparts in terms of leadership ability. 2 Against this background, Becker, Medjedovic, and Merkle (2019) emphasize that analysts tend to focus on information about CEO extraversion to predict CEO quality and firm performance. Grounded in the social cognition literature (Bodenhausen and Wyer 1985;Bodenhausen and Lichtenstein 1987), they contend that analysts issue more favorable forecasts (target price, long-term earnings growth, and earnings per share) for firms led by extraverted CEOs based on the belief that extraverted CEOs are more successful than less extraverted CEOs.…”

“…We contend that although analysts issue more favorable forecasts for extraverted CEOs (Becker, Medjedovic, and Merkle 2019), such CEOs often require external funding to meet their greater acquisition and investment goals (Malhotra et al 2018) and settle their higher salaries and compensation contracts (Green, Jame, and Lock 2018). However, because firms with relatively extraverted CEOs experience less turnover, take greater risks, and have higher organizational capital risk, they tend to have greater cost of equity capital (Oh, Kim, and Van Iddekinge 2015;Green, Jame, and Lock 2018).…”

“…Indeed, research highlights that of the Big Five core personality traits recognized by psychologists (openness, conscientiousness, agreeableness, neuroticism, and extraversion), extraversion is most closely related to leadership success (see Malhotra et al 2018). Consequently, there is growing interest in how a CEO's extraversion drives strategic firm outcomes (e.g., Green, Jame, and Lock 2018;Malhotra et al 2018;Becker, Medjedovic, and Merkle 2019). Notwithstanding the growing theoretical and empirical interest in CEOs' personality traits in managerial decision making, our understanding of the strategic implication of CEO extraversion is far from complete.…”

“…In particular, the psychological and linguistic literatures suggest that extraverts have higher verbal output, exhibit less word variety, and use less formal and more assertive language (Malhotra et al 2018). Furthermore, extraverts use more positive and negative emotion words when communicating (Becker, Medjedovic, and Merkle 2019). Therefore, the textual measure serves as the closest attempt to capture an individual CEO's personality and might well reveal how assertive, decisive, active, sociable, upbeat, energetic, and/or optimistic (i.e., collectively, how extraverted) the manager is toward transforming financial decisions and/ or opportunities into collective action (Malhotra et al 2018;Druz et al 2020).…”