Managers’ Body Expansiveness, Investor Perceptions, and Firm Forecast Errors and Valuation

• Published date: 01 May 2022
• Author: ANTONIO DÁVILA,MARTÍ GUASCH
• Date: 01 May 2022
• DOI: http://doi.org/10.1111/1475-679X.12426

DOI: 10.1111/1475-679X.12426

Journal of Accounting Research

Vol. 60 No. 2 May 2022

Printed in U.S.A.

Managers’ Body Expansiveness,

Investor Perceptions, and Firm

Forecast Errors and Valuation

ANTONIO DÁVILA∗AND MARTÍ GUASCH†

Received 1 December 2020; accepted 21 November 2021

ABSTRACT

We examine the relation between a measure of managers’ physical display—

body expansiveness—and favorable reporting practices (in firm forecasts and

valuation information) and performance (survival and funding success). We

videotape 154 entrepreneurs pitching their business ideas, and use computer

vision software to obtain information about speakers’ movements. We show

that physical expansiveness correlates with higher forecast errors and pro-

posed firm valuations and lower survival rates yet higher likelihood of fund-

ing success. We argue that investors may incorrectly interpret nonverbal com-

munication in their assessments of entrepreneurs and propose a behavioral

∗Department of Accounting and Control, HEC, University of Lausanne, Lausanne, Switzer-

land; †Department of Economics, Finance, and Accounting, Universitat Ramon Llull (ESADE

Business School), Barcelona, Spain

Accepted by Regina Wittenberg Moerman. We appreciate helpful comments and

suggestions from an anonymous reviewer, Markus Arnold, Martin Artz, Marco Da Rin,

Miguel Duro, Mircea Epure, Javier Gómez-Biscarri, Matthias Mahlendorf, Per Olsson,

Petya Platikanova, Jeroen Suijs, Felix Vetter, Dimitri Yatsenko, and seminar participants

at MAS 2020 Midyear meeting, ACMAR-WHU Conference, JAR Conference, SPARK Meet-

ing, EAA, the Dutch Junior Accounting Meeting, the Swiss Winter Accounting Confer-

ence, ESMT Berlin, ESADE Business School, HEC Lausanne, Tilburg University, and

UPF Management Seminars. We also thank Sam Krumholtz (Turk Prime), Anna Plana

(IESE), Yakir Perlin (Cloudinary), and Francesc Serracant (HP) for excellent research as-

sistance. This work received financial support from Tilburg University, IESE, ESADE Busi-

ness School, and HEC Lausanne. An online appendix to this paper can be downloaded at

http://research.chicagobooth.edu/arc/journal-of-accounting-research/online-supplements.

517

© 2022 The Chookaszian Accounting Research Center at the University of Chicago Booth School of

Business

518 a. dávila and m. guasch

explanation. We further corroborate the proposed mechanism by studying

investor perceptions of entrepreneurs’ personal characteristics. Overall, we

shed light on an overlooked source of information—nonverbal behavior—

and relate it to firm forecasting, valuation, survival, and financing success,

which are important factors in the assessment of investment opportunities,

deal structure, and monitoring.

JEL codes: G12, G31, G41, M12, M13

Keywords: investor perceptions; financial projections; valuation; nonverbal

communication; entrepreneurs; startups

1. Introduction

Managers communicate information to capital market participants via both

quantitative and qualitative information. Accounting and finance research

has traditionally focused on quantitative information included in manda-

tory and voluntary disclosures and, more recently, exploited the textual in-

formation in corporate communications. Overall, these studies find qualita-

tive verbal communication to be incrementally useful in predicting a variety

of firm outcomes. (See Loughran and McDonald [2016] for a survey of the

literature.) In contrast, qualitative nonverbal information has received less

attention (Mayew and Venkatachalam [2012]), despite an abundant litera-

ture supporting the important role of nonverbal cues in the dissemination

of information (Burgoon, Guerrero, and Floyd [2016]).

We study whether body movement, one type of qualitative nonverbal in-

formation, is associated with managers’ favorable reporting in firm fore-

casts and valuation information and with firm performance (survival and

funding success). We use computer vision software (OpenPose) to ex-

tract two-dimensional skeletal information about managers’ physical dis-

plays and construct a composite measure of physical expansiveness. Relat-

ing individual nonverbal cues to corporate reporting and firm outcomes

may seem puzzling. Our arguments rely on the social psychology literature

connecting nonverbal behavior to personal characteristics (e.g., Gifford,

Ng, and Wilkinson [1985], Borkenau and Liebler [1992], Carney, Hall, and

LeBeau [2005], Zebrowitz, Montepare, and Strom [2013]). Nonverbal be-

havior often arises unconsciously, which explains why individuals can ex-

press and maintain a given personality trait without consciously invoking it

(Hall, Coats, and LeBeau [2005]). Our study builds on the premise that

qualitative nonverbal displays (“expressive behavior”) can transmit valu-

able information about the individual (manager) and thus about firm ac-

tions and outcomes (Ambady and Rosenthal [1992], Ambady, Bernieri, and

Richeson [2000]).

We use a sample of 154 videotaped entrepreneurs pitching their busi-

nesses to an audience of about 100 investors. We obtain a measure

of physical expansiveness by adapting a pose estimation program pro-

vided by the CMU Perceptual Computing Lab. The program allows us to

managers’ body expansiveness and firm outcomes 519

extract two-dimensional skeletal information about each speaker (i.e., phys-

ical joint coordinates). We further obtain financial forecasts and valuation

information from a four-page document that each firm distributes to in-

vestors at the beginning of an investment forum. This context suits our

research for at least three reasons. First, it ensures that the individual we

observe—the entrepreneurs presenting at the pitch contest—has prepared

or has been intimately involved in preparing the reported information.

In this way, the associations we test between individuals’ nonverbal behav-

ior and reported information are much cleaner than in traditional capi-

tal market settings, where information likely comes from multiple sources

(e.g., departmental forecasts) or is outsourced (e.g., underwriters provid-

ing firm valuation numbers). Second, we also test associations between indi-

viduals’ nonverbal displays and firm survival and funding success. We claim

that any individual effect on corporate outcomes is more likely present in

early-stage companies, given the crucial role of entrepreneurs in manag-

ing all areas of the firm. Third, the investment forums at which the en-

trepreneurs pitch are homogeneous events from which individuals’ body

movement can be captured. A comparable event in public companies is

not obvious—for example, earnings conference calls are homogeneous,

but few firms offer video recordings of them.

Our first research question examines whether entrepreneurs’ physical

expansiveness is associated with higher deviations between firm forecasts

and actual results and with overly high valuations (as proposed by the en-

trepreneur) compared to similar firms. We base these tests on the social psy-

chology literature, which links physical expansiveness with more dominant,

passionate, and attractive individuals (Carney, Hall, and LeBeau [2005],

Chen, Yao, and Kotha [2009], Vacharkulksemsuk et al. [2016]), three per-

sonal characteristics associated with self-confidence (Hatfield and Sprecher

[1986], Mobius and Rosenblat [2006]), assertiveness (Anderson and

Kilduff [2009]), feelings of power (Hall, Coats, and LeBeau [2005]), and

overconfidence (Fast et al. [2012]). We argue that entrepreneurs with these

characteristics make greater forecasting errors and propose higher valua-

tions, which are important informational inputs in the early-stage invest-

ment selection process, contract design, and monitoring stage (Kaplan and

Strömberg [2003, 2004], Gompers et al. [2020]).

Our second research question explores whether entrepreneurs’ physi-

cal expansiveness is associated with firm survival and actual investor fund-

ing decisions. Note that survival depends on the entrepreneur, whereas

funding decisions depend on investors. This distinction matters because

it allows the entrepreneur’s expansiveness to be directly associated with

survival—that is, expansive gesturing conveys individual characteristics that

affect firm development—but not with funding decisions, which relate

more to investors’ perceptions of the entrepreneur. Thus, the relation be-

tween the entrepreneur’s physical displays and the decision to invest as-

sumes that investor accurately perceive true personal characteristics of the

entrepreneur (dominance, passion, and attractiveness). We rely on findings