Call it the “CEO beauty premium.”
Two economists say their study shows that investors assign higher share values to companies run by attractive chief executives; that these chiefs are paid more than less appealing counterparts; and that the better looking the CEOs, the better they are at undertaking financially successful deals.
The conclusion of the unusual academic study — a sort of corporate version of “Hot or Not” — is that shareholders are as easily swayed by the glint in the eye of a chief executive as they are by a company’s actual numbers, at least in the short term.
According to a working paper by Joseph T. Halford and Hung-Chia Hsu at the University of Wisconsin, a good-looking CEO’s appearance had “a positive and significant impact on stock returns surrounding the first day when the CEO is on the job,” worth about 43 basis points in increased stock value compared with a CEO 10 percent less attractive. A one-point increase in attractiveness on a scale of 1 to 10, the study also found, “is related to a $873,000 increase in total wage, controlling for various firm and CEO characteristics.”
If you’re wondering who judges this executive beauty pageant, it is a computer.
Halford and Hsu loaded the pictures of 677 chief executives onto a website called anaface.com, which measures what it describes as “neoclassical beauty” by looking at the symmetry of a face — “the ratio of nose to ear length, the ratio of eye width compared to inner-ocular distance, the ratio of nose width to face width, the ratio of face width to face height, and the ratio of mouth width to nose width.”
Marissa Mayer, the chief executive of Yahoo, among the top 5 percent of attractive executives, according to the study, scored an 8.45 out of 10 on the Facial Attractiveness Index, or FAI. Paul Jacobs, chairman of Qualcomm, scored an 8.19. In comparison, actress Angelina Jolie scored about 8.5, the economists said. Her significant other, actor Brad Pitt, scored an 8.46. (It’s worth noting that the average score was no different between male and female chief executives.)
There is a long list of psychology research demonstrating that appearances matter more than most us would care to admit. As shallow as it may be, better-looking people have been shown in various studies to have higher self-esteem and more charisma, are considered more trustworthy and are better negotiators.
Another study conducted last year about hedge fund managers found that “hedge fund managers whose photographs are rated as more trustworthy are able to attract greater fund flows.” That same study, which relied on a group of people to examine photos of hedge fund managers, found, however, that “managers who are perceived as more trustworthy perform worse and generate lower risk-adjusted returns when compared to those who are perceived as less trustworthy.”
The study by Halford and Hsu set out to determine whether, in the context of a stock market that some say is efficient, good looks matter.
They discovered that “attractive CEOs receive more surpluses for their firms from M&A transactions, a finding consistent with the hypothesis that more attractive CEO’s improve shareholder value through superior negotiating prowess.”
They also found that the attractiveness of a chief executive who appears on television has a significant effect on the immediate performance of a company’s stock.
“Our findings suggest that factors unrelated to informational content, such as the attractiveness of interviewees on television, matter for stock returns,” the report said.
The researchers conclude that “our findings suggest that more attractive CEOs have higher compensation because they create more value for shareholders through better negotiating prowess and visibility.”
When I asked Halford and Hsu what the lesson of their study should be, they said that they believed that their work confirmed earlier studies that show attractive people were perceived to be better leaders and negotiators, not simply that shareholders found them more attractive.
“We would like to think that what we are finding is the manifestation of these underlying qualities,” they said in an email. “That is, we would hope that the world is not such a shallow place that much weight is placed on looks alone.” They added that the study’s results were still “unclear if it is looks driving the result or if it is the qualities shown to be associated with looks” that drive the stock performance.
That may all be true, but if the study’s conclusion is to be believed — a big if that we’ll get to in a moment — it would have implications for any business or investor seeking to influence the stock.
For example, does the attractiveness rating of an activist investor sway influence?
Halford and Hsu did not run pictures of activist investors through its beauty algorithm on anaface.com. So I did. Carl Icahn, who had quite a good year in 2013, scored a little above a 5. Bill Ackman, another activist investor, scored just above an 8.
When I asked the researchers for a full ranking of the chief executives they scored, or just the top five or 10, they refused.
“Selecting 5 to 10 CEOs is not representative of our results nor proper statistical procedure. Of course, we can find individual examples and counterexamples where there is positive or negative association between” looks and returns, they said. “Providing scores of select CEOs opens us up to such criticism even though these examples lack statistical merit.”
They told me the average CEO scored about a 7.3 out of 10.
That surprised me, given that most chief executives aren’t exactly in the same league with Jolie and Pitt. (My apologies to CEOs everywhere.)
All of this got me thinking as I tried to replicate some of the results by using anaface.com myself, that the beauty pageant scores of the chiefs might be a little off. For example, after I entered Ackman into the system using two different pictures, I received two different scores — more than a point apart.
When I raised this issue with the economists, they said that because all the photos were selected at random there should be no bias in the results.
It’s worth noting that the study didn’t take height into account. So far at least, there is no algorithm to identify the Napoleon complex.