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Handsome returns - Why beauty should be in the eye of the beholder, not the shareholder

26/10/2015

Andrew Evans

Andrew Evans

Fund Manager, Equity Value

Hand gestures can tell us many things. They can, for example, tell us ‘yes’ and ‘no’, they can say ‘well done’ and ‘maybe’ and they can wave us ‘hello’ or bid us ‘farewell’ – both politely and rather less so. But until the recent publication of a paper by three US business school academics, we had no idea they could tell us how successful a stockmarket floatation was going to be. 

In researching their paper, ‘Perceptions and price – Evidence from CEO presentations at IPO roadshows’, Elizabeth Blankespoor, Bradley Hendricks and Gregory Miller showed a range of people 30-second video clips of chief executives making roadshow presentations ahead of their companies’ initial public offerings (IPOs). 

They then asked those people to rank the chief executives on trustworthiness, confidence and attractiveness and linked that to how well each IPO price consequently did. The trio concluded that IPOs that were led by chief executives who scored very highly in those three areas tended to do much better than those with a less charismatic frontman – at least over the first few days. 

What might explain this? One possibility is that human beings boast a ‘sixth sense’ that allows them to gauge a company’s valuation and its future success simply by glimpsing its management team. Another – and the explanation we are more inclined to go with here on The Value Perspective – is that this is just another of those behavioural foibles we come across time and again in the world of investing. 

What we have here is something known as ‘exaggerated emotional coherence’ – or, more manageably, ‘the halo effect’ – which is the idea that people are far more likely to buy into what they are being told when the person doing the telling is a charismatic presenter rather than, say, someone who is perhaps rather duller and more numbers-focused. 

But of course it does not automatically follow that charismatic presenters make the best chief executives and thus, as investors on the hunt for stocks that will outperform in the medium to long term, we need to be looking beyond such distractions as a dazzling smile, a couple of amusing anecdotes and a casual yet masterful way with a laser pointer. 

We introduced the idea of a timeframe into that last paragraph because ‘Perception and price’ also looks at how investors might do if they bought a stock purely on the perceived trustworthiness, confidence and attractiveness of its chief executive and then held onto it for a year. The researchers found no statistical evidence of any relationship between these characteristics and outperformance. 

One slightly alarming point emerging from the paper is that trustworthiness was rated the least important of those three characteristics by participants in the study while attractiveness was seen as the most important – and, at this point, we should quickly add that our concern has nothing to do with what you see in any of the mugshots that accompany the articles on The Value Perspective. 

Rather, we view the paper as further evidence not only of why investors should be wary of IPOs but of the emotional bias to be found in investment. Here on The Value Perspective, we do not believe we are immune to such bias, which is why we are wary in our dealings with company management. We may miss out on some opportunities as a result but it does help us stay true to our investment process.

 

Author

Andrew Evans

Andrew Evans

Fund Manager, Equity Value

I joined Schroders in 2015 as a member of the Value Investment team. Prior to joining Schroders I was responsible for the UK research process at Threadneedle. I began my investment career in 2001 at Dresdner Kleinwort as a Pan-European transport analyst. 

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