Associate Professor of Finance Biljana Adebambo on the Downside of Extroverted CEOs

Wednesday, August 14, 2019TOPICS: Research

Biljana Adebambo, USD Associate Finance Professor
Associate Professor of Finance Biljana Adebambo was cited in the Wall Street Journal for her research on CEO extraversion and the cost of equity capital, which she conducted alongside Distinguished Professor of Accounting Robert Bowen and Associate Professor of Finance Pengcheng Zhu. Article excerpt below.
 

The Downside of Extroverted CEOs

While talkative, energetic, sociable leaders may wow investors and employees, they may not be good for business.

Public companies run by chief executives with extroverted personality traits have a higher cost of equity capital - the return shareholders demand for bearing the risk of owning the asset - than otherwise similar firms with less-outgoing CEOs, according to new research led by Biljana Adebambo, an associate finance professor at the University of San Diego. The cost of equity capital is a key measure of a firm's financial health because it affects how investors value a firm and can affect the profitability of coming projects, she says.

In the study, the researchers scored CEOs on extroversion by analyzing their language during the unscripted question-and-answer portion of earnings conference calls, using a previously established model that tracks attributes related to the personality trait. They analyzed 76,815 quarterly earnings-call transcripts from companies in the S&P 1,500 over a nine-year period. They then compared extroversion scores for each chief executive with the firm's cost of equity

They found that the higher the chief executive scored on the extroversion personality scale, the higher the return investors expected for risking their capital in the company, creating a higher cost of equity. The 20% of firms with the most extroverted chief executives had 20% lower company valuations on average than the 20% of firms with the least extroverted leaders. (When a company has a lower valuation, it has a higher cost of equity because it must sell more stock to fund projects.)

In the long run, a high cost of equity can hurt a company because it "will make fewer projects profitable for the firm to undertake," says Prof. Adebambo.

The researchers chose to focus on extroversion because ...

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Renata Ramirez
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