The value of personality - Using algorithms and econometrics to analyze CEO conscientiousness and its impact on M&A performance

Abstract

Even after years of extensive and rigorous research, there is still a puzzling question relating to why managers keep engaging in M&A activities in spite of their tendency to destroy value for the shareholders of the acquiring firm. By seeking explanations in personality psychology, we examine the relationship between CEO conscientiousness, short-term stock market reactions and CEO acquisitiveness. With the help of modern personality assessment, we use an algorithm to analyze 17,842 transcribed quarterly earnings calls and generate personality scores for 838 CEOs of acquiring firms in the S&P Composite 1500® index. Additionally, these CEOs are associated with our sample of 1,371 completed M&A transactions announced between the years 2006 and 2018. By employing several regressions, we conclude that the Big Five personality trait conscientiousness, which is associated with self-discipline, attentiveness to detail, risk aversion and a focus on long-term goals, has a positive impact on acquirer short-run cumulative abnormal returns. We also conclude that CEO conscientiousness has a significant and negative impact on M&A bid premiums, meaning that CEOs ranking highly in this trait pay lower bid premiums. All in all, we find that the new insights offered in the cross section between personality psychology and corporate finance have been fruitful and represent a promising platform for future research to build on.