Can You Judge the Success of an IPO By Investor Perceptions of Its CEO?

Venture capitalists and investment bankers have always claimed that they invest in people, not just companies. That bit of fatuous, self-congratulatory bombast is generally intended to imply that the investors in question are astute judges of character and not just the soul-less bean-counters in Gucci that is often closer to the mark.

But it turns out that this focus on personality, presentation and perception is more than just puffery. There is a statistical link, as the following article explains, between impressions of credibility and actual IPO performance. What this suggests is that investors, for all their hard numbers mien, must increasingly recognize that the factors driving success or failure are determined by inputs beyond those on the balance sheet and income statement. There are those who might consider this a weakness, a flaw in the analytical process, a sign of degenerative illness in the serious business of investing in business.

In an economy increasingly driven by intangibles like leadership, intellectual capital and employee commitment to enterprise strategy, this should, on the contrary, be regarded as a strength. It is a positive sign that the managerial qualities necessary to optimize value in a highly competitive, network-centric environment have not been lost on those charged with funding innovation. It might be even be a sign of hopefulness: that resource allocation and its outcomes looks beyond the data to consider who and what produces it. JL

Telis Demos reports in the Wall Street Journal:

Perceptions of the CEO are a strong predictor of an IPO’s price. The study found that for the average CEO, a 5% higher rating on perceptions correlated to an IPO price roughly 11% higher than the price that would be expected based on fundamentals alone.
Wall Street is hardly a beauty pageant.
But a new study suggests that when it comes to taking a company public, appearances can matter.
The more a chief executive’s gestures and manners exude competence during investor pitch sessions, or the CEO is viewed as attractive or trustworthy, the more likely he or she is to have a higher-priced IPO, according to the study conducted by Elizabeth Blankespoor of Stanford University’s Graduate School of Business, Bradley Hendricks of the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill, and Gregory Miller of the Stephen M. Ross School of Business at the University of Michigan.
(Be sure to try MoneyBeat’s “Predict the Best IPO Based on the CEO’s Presentation”.)
The finding might not be surprising to anyone who works in sales. But in the financial realm, investors often like to consider themselves beyond such superficial influences. Instead, many believe they are swayed only by impressive revenue projections, management pedigree or market-share forecasts.
“You have the information already in a prospectus. You have information about the CEO’s background,” said Ms. Blankespoor. “What’s important about actually meeting them?”
To answer that question, Ms. Blankespoor and Messrs. Hendricks and Miller turned to the field of psychology. They used the concept of “thin-slicing,” or how our brains use brief impressions to make decisions. Psychologists have found that people learn a surprising amount about a person by observing their expressive gestures.
The professors used the impressions of 900 random people, via Amazon.com Inc.’s Mechanical Turk service, who as a group watched 224 CEOs make their pitches.
The participants were told nothing about the CEO or the company. (In the rare case a participant recognized the CEO, that response was excluded from the survey.)
Each participant was asked to view 30-second video clips of the presentations—which obscured what the person was saying, to make sure the participants weren’t swayed by the pitch itself—and then rate the CEOs on three criteria: Attractiveness, competence and trustworthiness.
They found that perceptions of the CEO are a strong predictor of an IPO’s price. The study found that for the average CEO, a 5% higher rating on perceptions correlated to an IPO price roughly 11% higher than the price that would be expected based on fundamentals alone.
The researchers adjusted for other factors, including the CEOs’ gender or educational background, or whether companies that were more profitable tended to have more impressive-seeming CEOs.
A high rating on a CEO’s competence was the best predictor of a higher IPO price, followed by attractiveness. Trustworthiness was the least important factor, though it still mattered.
The result offers a potential explanation of why investors consider roadshows important, said Ms. Blankespoor. “Part of a CEO’s job is to have a presence…and convey the company’s story,” she said.
Notably, companies run by CEOs with higher impression scores still had better-performing shares a year after the IPO. This may suggest that investors aren’t just hoodwinked by a smooth talker, but may be making a rational judgment that a CEO who impresses bodes well for the company’s future performance, Ms. Blankespoor said. “CEOs are going to make initial impressions over and over again,” she said.

Source: Edited versions of videos archived from NetRoadshow.com by researchers at Stanford, University of North Carolina at Chapel Hill, and University of Michigan