The Effect of CEO Extraversion on Analyst Forecasts: Stereotypes and Similarity Bias

AuthorChristoph Merkle,Josip Medjedovic,Jochen Becker
Published date01 February 2019
Date01 February 2019
The Financial Review 54 (2019) 133–164
The Effect of CEO Extraversion on Analyst
Forecasts: Stereotypes and Similarity Bias
Jochen Becker and Josip Medjedovic
German Graduate School of Business and Law, Heilbronn, Germany
Christoph Merkle
uhne Logistics University, Hamburg, Germany
In an experiment with professional analysts, we study their reliance on CEO personality
information when producing financial forecasts. Drawing on social cognition research, we
suggest analysts apply a stereotyping heuristic, believing that extraverted CEOs are more
successful. The between-subjects results with CEO extraversion as treatment variable confirm
that analysts issue more favorable forecasts (earnings per share, long-term earnings growth,
and target price) for firms led by extravertedCEOs. Increased forecast uncertainty leads to even
stronger stereotyping. Additionally, personality similarity between analysts and CEOs has a
large effect on financial forecasts. Analysts issue more positive forecasts for CEOs similar to
Keywords: financial analyst, CEO personality,nonfinancial information, stereotyping heuris-
tic, similarity bias, extraversion
JEL Classifications: G02, G24, M12
Corresponding author:K
uhne Logistics University,Department of Management and Economics, 20457
Hamburg, Germany; E-mail:
We are grateful to participating financial institutions for enabling us to conduct the fieldexperiment with
their employed analysts. We confirm that we havereceived an institution granted approval to use human
subjects in this study. We thank Srini Krishnamurthy (the Editor), Elizabeth Demers, Sasan Mansouri,
Sebastian M¨
uller, Niels VanQuaquebeke, Utz Weitzel, Yachang Zeng, and participants of the EF 2017,
Nice, the SGF 2018, Zurich, and the EAA 2018, Milan.
C2019 The Eastern Finance Association 133
134 J. Becker et al./The Financial Review 54 (2019) 133–164
1. Introduction
As information intermediaries in financial markets, financial analysts collect,
analyze, and interpret value-relevant information about firms. They use financial
and nonfinancial information to produce earnings forecasts, target prices, and stock
recommendations based on their assessment of the quality and investment worthiness
of a firm (Schipper, 1991).
Prior studies suggest nonfinancial information is important for supplement-
ing analysis and for making accurate forecasts (Amir, Lev and Sougiannis, 2003;
Vanstraelen, Zarzeski and Robb, 2003), and report that analysts incorporate nonfi-
nancial information into their analyses. The evaluation of nonfinancial or qualitative
information remains a black box, as little is known about how analysts process this
information (Bradshaw, 2009; Beccalli, Miller and O’Leary, 2015). While financial
accounting information can be processed through sophisticated estimation models,
there is no standard method for evaluating nonfinancialinformation (Whitwell, Lukas
and Hill, 2007). Recently, Brown, Call, Clement and Sharp (2015) call for the pene-
tration of the black box to advance the analyst literature with regard to nonfinancial
Management quality is one item of nonfinancial information (Bradshaw, 2009),
sometimes even regarded the most important piece of nonfinancial information
(Grunert, Norden and Weber,2005). We argue that financial analysts use information
about CEO personality as a proxy for management quality (Chatterjee and Ham-
brick, 2007). However, judgments of management quality based on CEO personality
involve subjectivity and might be influenced by personal perceptions of or interac-
tions with top managers. This possibility motivates our main research question: How
do financial analysts incorporate personality information into their forecasts of firm
We focus on CEO extraversion as a visible dimension of CEO personality that
provides insights on financial analysts’ appraisal of top management. Research on
organizations and management devotes considerable attention to the organizational
importance of top executives. Theyplay a decisive role in strategy formation, strategy
implementation, and leadership. Following the theory of upper echelons (Hambrick
and Mason, 1984), a complementary line of research across different disciplines
examines the impact of specific executive characteristics (e.g., sociodemographics,
functional experience, personalities, attitudes, and values) on the organization and its
outcome. Corporate practices such as firm investment activities (Malmendier and
Tate, 2005), financial reporting (Schrand and Zechman, 2012; Olsen, Dworkis
and Young, 2013), as well as organizational structure (Nadkarni and Herrmann,
2010) and corporate culture (O’Reilly, Caldwell, Chatman and Doerr, 2014) have
been shown to relate to CEO characteristics. These and others studies reveal that
observable characteristics of top executives havevalue-enhancing potential for orga-
nizational outcomes. Consequently, financial analysts tend to use information about
the personal qualities of the CEO for their analyses (Chatterjee and Hambrick, 2007).
J. Becker et al./The Financial Review 54 (2019) 133–164 135
We argue that analysts use information about CEO extraversion to predict CEO
quality and firm performance. The personality dimension of extraversion is the first
trait perceived by others at the beginning of an interaction (McCrae and Costa,
1989; Koole, Dijksterhuis and van Knippenberg, 2001). Moreover, leadership ability
has been linked to extraversion (Grant, Gino and Hofmann, 2011), which makes it
an important attribute in the context of assessing CEO qualities. Drawing on social
cognition research (Rothbart, Fulero, Jensen, Howard and Birrell, 1978; Bodenhausen
and Wyer, 1985; Bodenhausen and Lichtenstein, 1987), we assume that financial
analysts are subject to the judgmental heuristic of stereotyping when processing
information about CEO personality. A stereotype is a mental shortcut by which
specific traits are associated with specific outcomes.
The personality of the analysts themselves may play an important role in the
processing of information about CEO personality. We suspect that personality simi-
larity between the financial analyst and the CEO can trigger a similarity bias (Byrne,
1971) and exacerbate the main effect of stereotyping.
In a large field experiment with 191 financial analysts from 12 European coun-
tries, we explore the relationship between nonfinancial information and profitability
forecasts. Eames, Glover and Kennedy (2002) suggest that an experimental approach
is often the most appropriate method to explore cognitive processes. We contacted
the heads of equity at large European brokerage firms and banks, who as research unit
directors were in a position to instruct their analysts to participate. During the exper-
iment, analysts received a short description of a fictitious software firm, its financial
performance over the last three years, and information about the CEO, which is the
treatment variable. Based on this information, we asked analysts to forecast annual
earnings per share (EPS), long-term earnings per share growth (LTG), and target
price. Importantly, participants issued two sets of forecasts, before and after infor-
mation on the CEO is revealed. Toaccount for a similarity effect, we asked financial
analysts to complete a brief personality inventory at the beginning of our experiment.
There is a strong effect of CEO personality on all forecast variables. An ex-
traverted CEO is seen as the more prototypical head of a firm, which is confirmed
by participants’ views on leadership quality, competitive performance, and financial
prospects. They expect significantly higher expected earnings, long-term growth,and
price targets when the firm is led by the extraverted CEO.
Short-term and long-term forecast horizons induce different levelsof uncertainty
and complexity in the forecasting process. Financial analysts are known to apply
heuristics when making forecasts (Amir and Ganzach, 1998). With increasing task
complexity and uncertainty, individuals are more likely to use heuristics (Tversky
and Kahneman, 1974; Bodenhausen and Lichtenstein, 1987). We thus expect that
analysts’ rely more heavily on stereotyping when making longer term forecasts.
Indeed, the treatment effect is weakest for the EPS forecast and stronger for the
long-term growth and price target.
With regard to the similarity effect, we findthat participants issue more positive
forecasts when their own personality is in line with the personality of the CEO. While

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