Having an Egomaniac CFO Brings a Company Higher Valuations

Having a narcissist in charge of a company’s finances brings higher valuations from financial analysts, finds new research from the University of Maryland’s Robert H. Smith School of Business.

The Smith School’s Nick Seybert, associate professor of accounting, looks at the role of a chief financial officer and whether that person’s narcissistic tendencies impact how financial analysts perceive the company and the valuation they give the firm.

Seybert — who says he’s always been interested in personality traits and has known many narcissists — has several research papers about narcissism and dark personality traits. 

“Most of the research has the flavor that narcissism is generally a bad thing,” he says. “My papers show that narcissists manipulate earnings. They invest in things that probably aren’t good investments. Yet they are more likely to move up the ladder at work and more likely to get paid more. Also, recruiters sometimes seek out narcissists if the firm needs them to do something unethical.”

But this research, forthcoming in the Review of Accounting Studies, casts a much more positive light on narcissistic executives, at least in the financial domain, Seybert says.

He and his co-authors looked at CFOs because they interact most with financial analysts and preside over the accounting, bookkeeping and general financial health of an organization. Initially, the researchers hypothesized that financial analysts might not fall for a narcissist CFO’s puffery and smoke and mirrors.

“Financial analysts are supposed to be the smarter stakeholders,” he says. “They convey information to institutional investors and other investors and they’re supposed to dig into this stuff and be very analytical. We thought that narcissism could backfire and make analysts skeptical.”

But that’s not what Seybert and his co-authors find.

“We find that the more narcissistic CFOs are, the higher the analyst valuations are of the company.”

The researchers dug deeper to find out why. They looked at conference calls, where CEOs, CFOs and other executives talk to investors and take questions from analysts.

“We show that on those calls, more narcissistic CFOs actually say more sentences and use more words,” says Seybert. In general, they use a more positive, optimistic tone. They’re more likely to use euphemisms to obscure reality or make it sound nicer. For example, a narcissistic CFO might say something like, “We’re not doing poorly. We just hit a speed bump.” Or, “There are just some headwinds we have to get through.”

But they also use more argumentative language and are more likely to push back if an analyst calls anything into question. The researchers show that narcissistic CFOs were more likely to specifically call on bearish, or pessimistic, analysts to argue with them to try to increase their valuation of the company.

“We show that the more of those things they do on these calls, the higher the analyst valuations are,” Seybert says.

The researchers also ran a lab experiment to test the effect. They put finance and business professionals in a scenario where they measured their actual narcissism with a narcissism scale. Then they asked them which of six potential strategies they’d use on a private phone call with an analyst who is pessimistic about their firm to try to raise their valuation. The strategies include things like talking in a more positive tone, to making threats to not take that analyst’s calls in the future, to offering to reciprocate a better valuation with a favor.

“We show that narcissists are way more likely to do those things, especially give a threat,” Seybert says.

In fact, they find narcissists are over 100% more likely to give a direct threat to an analyst.

But that doesn’t mean it’s bad to have a narcissist CFO, Seybert says — at least for the company. 

“Here we show that they have this positive effect on an important external stakeholder, and they probably have effects on other stakeholders, too,” he says. “They get not just higher analyst valuations, but more positive recommendations for investors — like buy, sell, hold recommendations for their stock.”

One big measure of success in the accounting finance domain is whether a company meets or falls short of analyst expectations, Seybert says. “It’s a little bit counterintuitive, but you don’t necessarily want to have really high analysts’ earnings forecasts, at least not within the same quarter, because you don’t want to miss it.”

There is evidence that in some cases, analysts walk back their really optimistic forecasts so it’s easier for the company to beat them.

“In this research, we show that walkback is bigger for narcissist CFOs’ companies,” Seybert says. “They are able to get analysts to mute their expectations, then they can easily beat the earnings forecast, all the while getting a higher valuation overall and higher recommendations.”

If the company is able to meet its earnings expectations and if the recommendations are good, then the stock price tends to perform better.

“With that full picture, it’s hard to argue that having a narcissist CFO is a bad thing, at least from the perspective of the company and markets,” says Seybert. “Every company would love to have high valuations and still be able to meet the forecast expectations.”

Read Seybert’s research, “CFO Narcissism and the Power of Persuasion Over Analysts: A Mixed-Methods Approach,” forthcoming in the Review of Accounting Studies. The paper is co-authored by Charles Ham and Mark Piorkowski of Indiana University’s Kelley School of Business, and Sean Wang of Southern Methodist University.