UF Research: CEO Charisma Affects Stock Prices

September 3, 2003

GAINESVILLE, Fla. — The head honcho’s clever workings influence all aspects of a company, and according to a recent University of Florida study, their powers of persuasion don’t end with the firm.

The study found securities analysts predict a firm’s future performance based not only on its track record but also on how favorably they view the company, which is influenced largely by how charismatic they consider its chief executive officer.

That influence indirectly affects the price of a company’s stock because investors use the tainted predictions to decide whether to buy or sell stock, said Angelo Fanelli, who conducted the study for his doctoral dissertation at the UF Warrington College of Business.

“The essence (of this study) is in this particular relationship between the CEO and securities analysts, a charismatic leader will make a security analyst excited, and then he will rate a company more favorably in his recommendation to stockholders,” said Fanelli.

However, the effects of CEO charisma do not mean an analyst is more accurate in predicting the future performance of a company, said Fanelli, who has been hired as a professor of management by the Hautes Etudes Commerciales School of Management in Paris.

This creates a problem in the stock market, because it could lead to investor overconfidence about which stock and how much stock to buy and sell, he said. This in turn affects stock prices.

Henry Tosi, a UF professor of management and Fanelli’s advisor on the study, said Fanelli’s research was the first to demonstrate the affect a CEO’s charisma has on analysts and investors.

“What’s important is while it (charisma) does affect an analyst’s recommendation, the accuracy of the recommendation has nothing to do with the CEO,” he said. “The analysts tend to overrate the future earnings of a firm.”

Vilmos Misangyi, an assistant professor of business at the University of Delaware, said many studies show companies make an effort to create a particular image in an attempt to control analysts’ and investors’ impressions of a firm. And, he said, it makes sense that CEO charisma would have an affect on analysts’ predictions.

“Charismatic leaders create order out of disorder,” Misangyi said. “Since securities analysts are in the business of predicting the future, it is hard to imagine they would not be affected by charismatic CEOs who, given their confident and visionary nature, help to define the future.”

For his study, Fanelli developed a method to measure CEO charisma. Using a database of charismatic language as defined by psychological dictionaries, he determined a CEO’s charismatic image score based on the frequency of use of charismatic language in letters to stockholders, which were evaluated using a computerized text analysis.

The study focused on 367 U.S. firms, all with more than $10 million in assets, which underwent CEO successions between 1990 and 1999. In each case, Fanelli did a content analysis of the letters accompanying each company’s annual financial report for the new CEO’s first term on the job. This letter is one of the first impressions a chief executive makes on a company’s stockholders and is important because it can shape subsequent opinions investors form about a company, Fanelli said.

He then analyzed how strong analysts recommendations to buy a stock were, how uniform they were in their recommendations about whether to buy or sell a company’s stock and how accurate they were in forecasting each company’s future earnings per share.

The results showed CEO charisma significantly affected the perceptions of analysts, leading them to recommend to investors the stock of a firm with a charismatic CEO in a more favorable way. The study also found, as a group, securities analysts are more likely to have more similar high recommendations for a firm that received a high score for CEO charisma.

“I am very skeptical of big words and big men,” Fanelli said. “This study confirms there are reasons to be skeptical about CEOs.”