CEO EXTRAVERSION AND CAPITAL STRUCTURE DECISIONS: THE ROLE OF FIRM DYNAMICS, PRODUCT MARKET COMPETITION, AND FINANCIAL CRISIS

• Published date: 01 December 2020
• Date: 01 December 2020
• Author: Kwabena Kesse,Albert Danso,Theophilus Lartey
• DOI: http://doi.org/10.1111/jfir.12227

The Journal of Financial Research Vol. XLIII, No. 4 Pages 847–893 Winter 2020

DOI: 10.1111/jfir.12227

CEO EXTRAVERSION AND CAPITAL STRUCTURE DECISIONS: THE ROLE

OF FIRM DYNAMICS, PRODUCT MARKET COMPETITION, AND

FINANCIAL CRISIS

Theophilus Lartey

De Montfort University

Kwabena Kesse

University of South Dakota

Albert Danso

De Montfort University

Abstract

Using panel data of U.S. firms, we focus on an important yet understudied facet of

the chief executive officer’s (CEO) personality—extraversion—and how it affects

corporate capital structure decisions. We examine how this relation is moderated by

financing (tax) benefits, financial crisis, firm size, growth opportunities, and

collateralization. The results show that firms managed by extraverted CEOs use

greater financial leverage, adjusting toward target leverage levels at a faster speed,

with about half‐life within a year for book and market leverage. In addition, the

positive extraversion–leverage relation is enhanced for firms that are large, have

greater collateralizable assets, and are more vulnerable to external shocks (financial

crisis). Last, although the positive extraversion–leverage relation holds particularly

when product market competition is high, the effect is attenuated for high‐growth

opportunity firms.

JEL Classification: G01, G32, G40

I. Introduction

As part of the wider intellectual discourse focusing on chief executive officers

(CEOs), there is a burgeoning literature that seeks to understand how CEOs’

personality affects the behavior of the firms they lead (e.g., Cain and

McKeon 2016; Gow et al. 2016). In particular, extraversion is a personality trait

of interest in the social psychology literature because of its positive correlation

with leadership ability. For instance, extraverts are known to thrive in dynamic

social environments such as corporate environments where they make decisions

based on uncertain, ambiguous, and often conflicting information (Matthews,

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© 2020 The Authors. Journal of Financial Research published by Wiley Periodicals LLC on behalf

of The Southern Finance Association and the Southwestern Finance Association

Deary, and Whiteman 2003). Extraverted CEOs tend to make strategic corporate

decisions under high pressure and the scrutinizing eyes of the firm’s stakeholders

(e.g., Wilt and Revelle 2016). 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.

We examine the influence of CEO extraversion on the capital structure decision by

using panel data of U.S. firms during 2000–2015. Examining CEO extraversion on firm

capital structure decision making is important because it provides important insight into how

top management traits affect firms’key strategic decisions. Furthermore, we assess the extent

to which the recent global financial crisis in 2007–2009 affected the extraversion–leverage

relation, as the desire for debt accumulation is expected to vary during the crisis versus

noncrisis periods (Fosu et al. 2016). Finally, we seek to understand the extent to which the

CEO extraversion–leverage relation is conditional on firm size and collateralization. Our

analysis shows that CEO extraversion exerts a positive and significant influence on the

firm’s financial leverage, suggesting that firms with CEOs who are extraverted tend to

increase their leverage because of the CEOs’innate affinity for risk taking (Judge

et al. 2002). Intuitively, firms that are managed by extraverted CEOs tend to exhibit lower

valuations and equity issuance (Adebambo et al. 2019) but rely more on the debt issuance,

which leads to greater debt levels in their capital structure. In addition, our study reveals that

the impact of CEO extraversion on firm leverage is more severe during the crisis and

postcrisis periods than during the precrisis period. This suggests that the adverse effects of

the financial crisis induced extraverted CEOs and their firms to accumulate more leverage.

Furthermore, we find that firm size and collateralization moderate the extraversion–leverage

relation. Also, although the positive extraversion–leverage relation holds particularly when

product market competition is high, the effect is attenuated for high‐growth opportunity

firms. Our results are robust to alternative measures of extraversion and leverage, as well as

endogeneity concerns.

Our article contributes to the literature in the following ways. First, although it

builds on the literature on the CEO personality–corporate policies relation (e.g.,

Herrmann and Nadkarni 2014; Papadakis and Barwise 2002), it is the first to examine

the link between CEO extraversion, measured via the linguistic tone and vocal cues

during an earnings conference call, and capital structure decision making. By doing so,

we contribute to the literature on how managerial personality traits affect key strategic

decisions of firms (e.g., Cain and McKeon 2016; Malhotra et al. 2018; Malmendier and

Tate 2005, 2008).

Our second contribution focuses on the 2007–2009 financial crisis. By

assessing the differential effect of CEO extraversion on financial leverage across the

precrisis, crisis, and postcrisis periods, we highlight the extent to which CEOs behaved

differently as a result of the adverse effects of the financial crisis. We document the

848 The Journal of Financial Research

extent to which the impact of the financial crisis induced extraverted CEOs and their

firms to accumulate more leverage.

Finally, our article highlights the sensitivity of the CEO extraversion–leverage

relation to firm size, collateralization, firm growth, and product market competition.

Although the literature (e.g., Fosu et al. 2016; Danso and Adomako 2014) reports the

extent to which firm size, collateralization, firm growth, and product market

competition influence the likelihood of adopting more debt, the role of these variables

on CEO personality traits and leverage decision making is limited. Therefore, we

demonstrate that extraverted CEOs who manage big firms that also have a huge

collateral base tend to employ more leverage. Furthermore, extraverted CEOs are likely

to use more leverage when product market competition is high but less likely to do so

when their firms have valuable growth opportunities. Overall, our article adds to the

growing accounting and finance literatures that examine the use of textual analysis to

understand noncognitive CEO personality traits (e.g., Gow et al. 2016; Loughran and

McDonald 2016; Malhotra et al. 2018).

Indeed, our article differs in several respects from earlier work by Park (2013).

First, Park uses the indicator variable Team Sports (which equals 1 if a CEO’s sporting

hobby includes volleyball, basketball, baseball, hockey, and/or soccer) to proxy for

extraversion. In contrast, our approach relies on linguistic algorithms to capture the CEO’s

speech patterns from the question and answer (Q&A) portion of earnings conference calls.

Specifically, we use linguistic algorithms to construct textual measures of extraversion for

882 CEOs in 905 firms. Inherently, the variable Team Sports may not fully capture

extraversion. For instance, entering a room packed with football stars, an extravert may

seek to dazzle the crowd with his athleticism and aura but an introvert may dip his head

and hope not to be noticed. In fact, a recent Forbes article argues that whereas Cristiano

Ronaldo perfected a shirtless, stylized showmanship (extraversion), Lionel Messi played

“the quiet game,”always a tad unkempt though a prolific scorer (introversion).

1

Nevertheless, both players have a passion and talent for soccer and just want to play.

Therefore, a sporting hobby may not necessarily imply extraversion as manifested through

outgoing, talkative, assertive, and energetic behavior (Gow et al. 2016). Extraversion,

which signifies leadership, can easily be inferred from a person’s communication style

(Dewaele and Furnham 1999; Green, Jame, and Lock 2018). 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).

1

Christina Settimi, “Ronaldo’s $105 Million Year Tops Messi and Crowns Him Soccer’s First Billion‐

Dollar Man,”Forbes (June 4, 2020), https://www.forbes.com/sites/christinasettimi/2020/06/04/ronaldos-105-

million-year-tops-messi-and-crowns-him-soccers-first-billion-dollar-man/#7ff906f15194.

849CEO Extraversion and Capital Structure Decisions