Companies are not faceless corporations; individuals such as CEO and CMOs set their strategies. Our systematic review focuses on four main characteristics—personality, demographics, experience and compensation—to arrive at below 10 propositions on innovation and stock returns. The empirical evidence is mostly based on CEOs, so we call for future research on other members of the top management team, especially CMOs, which often requires new data and analysis, and may lead to different insights. In this blog, I highlight the effect of personality characteristics of sensation seeking and overconfidence on innovation and stock returns.
Sensation seeking is ‘the seeking of varied, novel, complex and intense sensations and experiences, and the willingness to take physical, social, legal, and financial risk for the sake of such experiences’. Sensation seekers are more likely to be innovative because they are creative, are open to new experiences, prefer changes, and dislike structured and repetitive situations. Research shows that firms led by sensation seeking CEOs both produce more innovations and higher stock returns. In contrast, overconfidence refers to the tendency of individuals to believe they are better than they really are in terms of, for example, ability, judgment, or gauging the prospects of a successful outcome. Research shows that overconfident CEOs produce more innovation, but not necessarily higher stock returns. Overconfident CEOs tend to engage in unprofitable mergers and suboptimal investment behavior, thereby destroying firm value.
How can we tell such personality traits from available data? Research used CEOs’ penchant for flying small aircrafts to proxy for sensation seeking, and their exercise of fully vested stock options for overconfidence. Can we use the same for CMOs, or should we apply natural language processing to the CMO statements? Cognitive and emotional processes, such as overconfidence and sensation seeking, appear especially suitable for such analysis, which in our opinion may yield more accurate metrics than the accounting proxies used for CEOs in previous literature.
CMO personality may have a different impact than CEO personality, given the marketing background of CMOs (Pauwels 2014). For example, training small firm managers in marketing versus finance may result in a growth focus instead of an efficiency focus (Anderson et al. 2018). Therefore, we would expect CMOs to be more sensation seeking than executives with a financial background. Starting from such a high baseline, the relationship between CMO sensation seeking and stock returns may show diminishing returns and even an inverted U shape by itself. Moreover, a match between CMO and CEO characteristics is likely to improve innovation output and stock returns, while a mismatch (e.g., a sensation-seeking CMO and a conservative CEO) is likely to suppress firm performance.
Our propositions on demographic and compensation characteristics are similar for CEOs and CMOs, at least insofar as the CMO has sufficient power on the board to (partly) drive innovation and other strategic decisions affecting stock returns (Webster et al. 2005). Thus, future research should pay special attention to the roles of the CMO and other board members in the firm’s innovation and value-creating strategies (Verhoef and Leeflang 2009).
About the research: we synthesized the TMT literature from 2000 to 2018 on the relationship between CEO/CMO/TMT and innovation/stock returns from major marketing journals and leading journals in related fields, such as management, accounting, finance, and economics, on the UT Dallas top journal list and used keyword searches in several electronic databases such as ABI/INFORM, Business Source Premier, Google Scholar, and Social Science Research Network to better identify articles pertinent to our study. Finally, we reviewed the reference list in all the obtained articles. Our search resulted in 170 articles that empirically examine how TMT/CEO/CMO personality, demographics, experience, and compensation affect innovation and/or stock returns.
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Interesting article! As it relates to Gender, I don’t understand why it seems to be conflicting in the second chart. Are women both negatively and positively associated with innovation as well as negatively and positively impacting stock prices?
great question, Rachel! the jury is still out about whether women leaders are positively or negatively associated with innovation and stock price. We lay out the arguments and past research in the paper, and propose this as a future research question. What is your take?