CEO emotions and firm valuation in initial coin offerings: An artificial emotional intelligence approach

• Date: 01 March 2021
• Published date: 01 March 2021
• Author: Paul P. Momtaz
• DOI: http://doi.org/10.1002/smj.3235

RESEARCH ARTICLE

CEO emotions and firm valuation in initial coin

offerings: An artificial emotional intelligence

approach

Paul P. Momtaz

The Anderson School of Management, University of California, Los Angeles, California

Correspondence

Paul P. Momtaz, The Anderson School of

Management, University of California,

UCLA Anderson School of Management,

Suite C4.02, 110 Westwood Plaza, Los

Angeles, CA 90095.

Email: momtaz@ucla.edu

Funding information

Price Center for Entrepreneurship and

Innovation at UCLA

Abstract

Research Summary: How emotions impact firm valu-

ation is empirically understudied because affective

traits are difficult to quantify. However, using artificial

emotional intelligence, positive and negative affects can

be identified from facial muscle contraction-relaxation

patterns obtained from public CEO photos during ini-

tial coin offerings, that is, blockchain-based issuances

of cryptocurrency tokens to raise growth capital. The

results suggest that CEO affects impact firm valuation

in two ways. First, CEOs' own firm valuations conform

more to those of industry peers if negative affects are

pronounced (conformity mechanism). Second, investors

use CEO affects as signals about firm value and dis-

count when negative affects are salient (signaling mech-

anism). Both mechanisms are stronger in the presence

of asymmetric information.

Managerial Summary: The purpose of this paper is

to advance our understanding of how CEOs' affective

traits influence firm valuation by both, CEOs them-

selves and investors. The effect of CEO emotions is

plausibly particularly pronounced for start-up firms,

whose success prospects critically depend on their

leaders. My results suggest that CEO emotions impact

underpricing in initial coin offerings twofold. First, neg-

ative emotions are associated with CEOs choosing an

underpricing level that closely conforms to their peer

Received: 21 August 2018 Revised: 19 August 2020 Accepted: 21 August 2020 Published on: 14 September 2020

DOI: 10.1002/smj.3235

558 © 2020 Strategic Management Society Strat Mgmt J. 2021;42:558–578.wileyonlinelibrary.com/journal/smj

firms' average. Second, investors react to negative CEO

emotions by demanding higher discounts on firm value.

These effects are more pronounced when there is rela-

tively little public information about the ICO firm. My

paper is accompanied by artificial emotional intelli-

gence software for implementation in practice and

future research.

KEYWORDS

artificial emotional intelligence (emotion AI), CEO emotions, firm

valuation, initial coin offering (ICO), upper echelons theory

JEL CLASSIFICATION

G24; G32; G41; L26; M12; M13

1|INTRODUCTION

The paper examines how CEO affects

1

impact firm valuation in initial coin offerings (ICOs),

that is, blockchain-based issuances of cryptocurrency tokens to raise growth capital. Specifi-

cally, it addresses three research questions: First, how do CEO affects impact CEOs' own firm

valuations? Second, how do CEO affects impact how investors value firms? Third, how do infor-

mational asymmetries moderate how CEO affects impact firm valuation by both, CEOs them-

selves and investors? In this paper, I propose possible answers to all three closely related

questions by theoretically and empirically analyzing CEO affective traits obtained from a novel

artificial emotional intelligence (henceforth, emotion AI) approach.

Many studies conclude that CEOs have a significant impact on firm performance

(e.g., Hambrick & Quigley, 2014, 2015).

2

However, research on the role of CEO affects for firm

value is “very limited”and “largely remains a blind sport”(Liu et al., 2018, p. 800).

3

This lack is

due in large part to difficulties in obtaining reliable data on affective traits, and is thus limited

to specific case studies or survey-based evidence, with the latter often being subject to a selectiv-

ity bias. For example, Delgado-Garcia and De La Fuente-Sabaté (2010) find survey-based evi-

dence that managers' negative affective traits are related to conformist strategies and industry-

typical performance in a sample of Spanish savings banks. In a case study, Vuori, Vuori, and

1

Psychologists use different terms to refer to affects, such as emotions and mood, which can sometimes be difficult to

distinguish. Throughout the paper, I follow Forgas (1991) affect who uses affects as an inclusive label that refers to

emotions and mood.

2

See, for excellent overviews of CEO attributes that influence firm performance, Liu, Fisher, and Chen (2018) and

Wang, Holmes, Oh, and Zhu (2016).

3

Notable exceptions are Mayew and Venkatachalam (2012) who find a relation between firms' financial future and

managerial affective states measured from audio files of earnings conference calls and Blankespoor, Hendricks, and

Miller (2017) who use 30-s video clips of IPOs to study investors' cognitive perception of CEOs and how this impacts the

pricing of newly issued shares.

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