A study carried out by researchers at UBC Sauder School of Business shows that when CEOs are accountable for performance failures, stock analysts value their companies more highly.
To carry out the study, researchers electronically combed through more than 35,000 CEO conference calls to investors between 2002 and 2013. They examined how CEOs explained their companies’ performance on quarterly earnings calls and whether leaders attributed it to internal causes, such as strong leadership and effective decision-making, or external forces like supply issues, geopolitical conflicts or economic shifts.
According to the study, The Role of CEO Accounts and Perceived Integrity in Analysts’ Forecasts, when a company performed unfavourably and the CEO held themselves accountable, analysts’ forecasts were significantly higher than when the CEO blamed outside forces.
When a company’s performance was favourable, financial analysts’ forecasts were of course higher, and the way that CEOs explained their success had no significant impact.
In a follow-up experiment, researchers gave fictional earnings call scripts to 300 financial analysts. In some, the CEO blamed external forces for lower-than-expected quarterly results; in others, they took responsibility. The researchers then asked the analysts to share their perceptions of the leader and provide a forecast.
“Again we found that CEO accounts didn’t matter a whole lot when the company performed favourably,” said UBC Sauder professor Dr Daniel Skarlicki, who co-authored the study with UBC Sauder associate professor Dr. Kin Lo, Dr Rafael Rogo from the University of Cambridge and Dr Bruce Avolio and CodieAnn DeHaas from the University of Washington.
“But when the performance was unfavourable and CEOs pointed to internal factors – things they were responsible for, they scored higher in integrity – and that higher integrity in turn yielded higher financial forecasts.”
This, according to Dr Skarlicki, is down to a psychological phenomenon called the actor-observer bias: When a business does well, the CEO tends to credit internal forces, but outside observers are more likely to attribute the success to external factors. Similarly, when things go wrong, the CEO often points to outside forces, while outsiders scrutinise the CEO. When a CEO admits their mistakes, it can make them seem more trustworthy, which can benefit the company.
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