CEO Extraversion and the Cost of Equity Capital

Abstract

We examine whether CEO extraversion, an important personality trait associated with leadership, is associated with firms’ expected cost of equity capital. We measure CEO extraversion using CEOs’ speech patterns during the unscripted portion of conference calls. After controlling for multiple CEO and firm specific variables, we find a strong positive incremental association between CEO extraversion and firms’ expected cost of capital. Moreover, the cost of equity increases when a more extraverted CEO replaces a less extraverted CEO. In addition, we find that firms with relatively extraverted CEOs take more risk and exhibit lower credit ratings, which is associated with a higher cost of equity capital. These results are statistically and economically meaningful and do not appear to be driven by reverse causality, endogenous matching or look-ahead bias.

Keywords: CEO personality, extraversion, cost of equity capital, risk taking, firm valuation, capital issuance, firm efficiency

JEL Classification: G11, G32, G41, M40, M41