Decoding Investor Reactions to CEO Optimism

Mergers and acquisitions thrive on a strong story. Investors need to be convinced the deal is relevant, timely, and effective. CEOs, naturally, try to paint a rosy picture. But a recent study challenges the idea that investor reactions to CEO optimism are always positive, and highlights the need for CEOs to take a more nuanced approach.

The study, titled “A Contingency View of Impression Management: Heterogeneous Investor Responses to CEO Positive Portrayal of Mergers and Acquisitions” explores how effective CEO optimism is, based on audience expectations. Authors Conor Callahan, Ruixiang Song, Wei Shi, Kevin J. Veenstra, and Gerry McNamara use a theory called "expectancy violation theory." They identify factors linked to communicator, context, and audience characteristics that determine whether impression management tactics violate investor expectations.

Authors use a theory called "expectancy violation theory." They identify factors linked to the communicator, context, and audience characteristics that determine whether impression management tactics violate investor expectations.

To analyze investor responses, the researchers leveraged a dataset combining M&A conference call transcripts and news sentiment analytics from RavenPack. They then employed Ordinary Least Squares (OLS) regressions and found that the link between a CEO's positive portrayal of M&A deals and changes in investor portfolio weights is influenced by several factors:

• CEO duality

  If the CEO is also the board chair (CEO duality), investors are less likely to believe positive statements about the deal.

• Surprise factor

  If the M&A was unexpected (not foreshadowed), investors are more likely to be swayed by a CEO's positive spin.

• Investor type

  Short-term investors are more likely to be influenced by CEO positivity compared to long-term investors.

These key findings shed light on the intricate relationship between CEO optimism and investor reactions in M&A, and can serve as a valuable guidance for CEOs that navigate corporate transactions.

The research also opens doors for further exploration as it calls for the examination of alternative CEO communication tactics and the study of how CEO communication shapes expectations over time. Furthermore, it suggests that impression management, beyond M&A announcements, could hold untapped value in other corporate transactions.