New CEOs Tackle Outsider Uncertainty by Nailing First Impressions

December 13, 2019

CEOs at the beginning of their terms use future-looking statements and optimism to win over stakeholders.

At the start of their tenures, chief executive officers must quench the anxieties of stakeholders who feel unsure about an unknown and unproven leader. With market participants potentially affecting earnings, corporate performance, and ultimately the stability of their leadership position, a new CEO faces pressure to convey confidence and optimism beyond news releases or written reports. Quarterly earnings conference calls, which allow for direct communication with investors and analysts about operating performance and future strategies, give newly appointed heads of companies the opportunity to channel the power of first impressions.

Khrystyna Bochkay, Roman Chychyla, and Dhananjay Nanda of Miami Herbert Business School studied the communication styles of 573 new CEOs at public firms in the United States, using quarterly earnings conference calls between 2006-2014. Published in The Accounting Review, their study reveals that newly appointed CEOs often engage in overly optimistic language to attenuate stakeholder uncertainty.

One first-year CEO, for example, gave an eager rendering of his firm’s outlook with depictions that included phrases like, “one of the strongest,” “one of the industry’s best,” “one of the world’s largest,” and “geographically advantaged and low-risk.” 

Yet the researchers uncover a change in CEO tone from forthcoming and highly optimistic to more reserved and less enthused as tenure advances. The same CEO had a more moderate tone four years later: “[The company] continues to take advantage of its strategic location. Overall, we are pleased with results for the third quarter.”

Textual analysis, controlling for company performance and other firm-specific factors, captures a 13 percent decrease every year in the CEO’s number of future-looking statements and relative optimism (a comparison of the number of positive and negative words). Meanwhile, examination of the language of non-CEO top management team members, such as chief operating and chief financial officers, renders no change in the amount of disclosures or relative optimism. The variation in tenor belongs exclusively to the chief executive, who stands at the front line before the stakeholders.

The results depict a broader human tendency to put forth an accessible and optimistic disposition for a favorable first impression, especially in high-stakes situations. “It happens everywhere and applies to every person who is starting off in a new job or career,” says Nanda, who has also studied the communication styles of the last 12 U.S. presidents. “Every president in their first year, holds many press conferences, and then these press conferences decline,” he explains. “In the last year of their presidency, they hardly even talk to the press.”

Early tenure presents the most critical time for leaders to establish a connection with their audiences. Audiences, however, account for this behavior in their responses. The study reveals that, despite CEO efforts, stakeholders are not fooled by the early optimistic tone. The stock market only responds to fundamental news about the firm’s economic performance, independent of the CEO’s initial elaborated language. As Bochkay, Chychyla, and Nanda point out, investors anticipate and discount the excessive optimism at the beginning of a CEO’s term.

Nevertheless, the accessible and optimistic communication helps attenuate stakeholder uncertainty while a CEO establishes performance history. Gradually, experience in the role brings credibility and job security, reducing the pressure to project an overstatedly positive landscape. The progression of conference calls hence reveals messaging that wanes in the number of positive words, while negative words increase. With time and credibility, a leader “is more willing to share bad news,” says Nanda.

Time reduces stakeholder uncertainty and their demand for information, enabling CEOs, like presidents, to ease their tone and accessibility. Yet at first, new leaders must win over audiences by looking to the future and proposing an optimistic vision. Periodic voluntary disclosures serve as a powerful tool to achieve this goal. After all, second chances for first impressions don’t come readily.

Bochkay, K., Chychyla, R., & Nanda, D. (2019, July). Dynamics of CEO Disclosure Style. The Accounting Review, 94 (4), 103-140.
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