Business is personal: How CEO personality influences agency costs
CEO personality inferred from earnings-call language predicts agency costs: agreeable and conscientious CEOs diversify and overpay themselves less, neurotic CEOs more.
Summary
The authors use a language-analysis tool to infer CEOs' personality traits from their earnings calls and link those traits to self-serving decisions, namely unrelated diversification and pay that is disconnected from performance. Agreeable and conscientious CEOs are less likely to make such decisions, while neurotic CEOs are more likely to. The findings are presented as relevant to how boards hire and govern CEOs. Personality is inferred from speech rather than measured directly, so the strength of the link depends on the quality of that inference.
Editor's opinion
A CEO's temperament shows up in the decisions that matter most to shareholders: how far the firm diversifies into unrelated businesses and how the CEO is paid. Boards can treat personality as a governance input when they select and monitor a CEO, and should give more scrutiny to unrelated diversification and pay design where the CEO's profile points to higher agency risk.
Key concepts
CEO personality · agency costs · unrelated diversification · earnings calls · governance