CEO Trustworthiness and Corporate Innovation: The Face Value of CEOs

Abstract

We investigate how perceived CEO trustworthiness shapes corporate innovation under uncertainty and incomplete contracting. Drawing on the well-documented psychological evidence linking facial features to trait perception, we use a machine-learning model to construct a unique face-based measure of perceived CEO trustworthiness. This measure correlates strongly with higher employee ratings, greater shareholder support in proxy votes, and faster analyst revisions of earnings forecasts. Furthermore, firms led by more trustworthy-looking CEOs generate both a larger number of and higher-quality patents. A causal interpretation is supported by a difference-in-differences-in-differences test based on local trust crises triggered by financial fraud of geographically proximate but economically unrelated firms. Further mechanism tests suggest that trustworthy CEOs can pursue riskier projects and are also more efficient in innovation. Further evidence suggests that CEO perceived trustworthiness reduces perceived information asymmetries across stakeholders. It is associated with lower analyst forecast dispersion, a stronger sensitivity of innovation output to employee stock options, and stronger support for R&D from short-term institutional investors. Taken together, our evidence highlights the role of trust as a form of social capital that facilitates high-risk, high-return innovation.

Keywords: Trust, Facial Trait, Artificial Intelligence, Patents, Innovation, Information Asymmetry