The value of charisma
The language that new CEOs use to describe their vision can influence securities analysts’ forecasts of firm performance.
In Charisma We Trust: The Effects of CEO Charismatic Visions on Securities Analysts
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Angelo Fanelli (HEC School of Management), Vilmos F. Misangyi (Pennsylvania State University), and Henry L. Tosi (University of Florida)
Organization Science, vol. 20, no. 6
This study finds that having a charismatic new chief executive can be worth at least a few points in a company’s stock price. Charmed by the CEO’s magnetism and motivational language, financial analysts frequently make incorrect predictions about a company’s future earnings performance. That can be a serious mistake, because previous research has shown that even a one-point improvement in an analyst recommendation, for example from “hold” to “buy,” can boost the price of a stock by approximately 2 to 3 percent over the next month, seriously impacting its real and perceived value.
The authors studied 367 CEO transitions that occurred between 1990 and 1999. They examined the executives’ inaugural letters to shareholders, looking for charismatic language that challenged the status quo, empowered investors and company stakeholders, and couched goals in lofty moral or ideological terms rather than dull pragmatism. To evaluate the language in these documents, the authors used a text analysis system that assigns each sentence and phrase to one of a series of themes and then analyzes the words to see which ideas were stressed most often. (This is the same language evaluation technique often used by newspapers and political organizations to characterize the content of presidential speeches.) From their analysis of the inaugural letters, the authors determined that inclusive terms, such as we, us, and our, and phrases that express a belief in the collective way in which goals will be achieved are used most frequently by charismatic leaders. Next, the authors evaluated securities analysts’ subsequent recommendations and forecasts for companies led by silver-tongued CEOs, examining actual earnings per share (EPS) achieved and comparing those figures with the forecasts of EPS by the analysts covering each firm for one year following the letters’ release. During this period, analysts’ predictions were mistaken more often than they had been during the year prior to the CEO succession. Further, the researchers point out that it is possible that as more and more analysts respond to a CEO’s charisma by touting the company’s future, investors will see this positive consensus as a sign that the company’s stock will be stable.
The authors note that analysts and investors should be aware of this tendency to be blinded by charisma and the way it can affect their reputation and their investments. They argue that training could help analysts correctly account for the role that charismatic language plays in influencing their forecasts.
Charismatic CEOs can lead analysts to inflate their ratings of a company’s performance and, in turn, affect equity purchases by investors.