CEO emotions and firm valuation in initial coin offerings: An artificial emotional intelligence approach

Paul P. Momtaz

Strategic Management Journal, 2021, vol. 42, issue 3, 558-578

Abstract: Research Summary How emotions impact firm valuation is empirically understudied because affective traits are difficult to quantify. However, using artificial emotional intelligence, positive and negative affects can be identified from facial muscle contraction‐relaxation patterns obtained from public CEO photos during initial coin offerings, that is, blockchain‐based issuances of cryptocurrency tokens to raise growth capital. The results suggest that CEO affects impact firm valuation in two ways. First, CEOs' own firm valuations conform more to those of industry peers if negative affects are pronounced (conformity mechanism). Second, investors use CEO affects as signals about firm value and discount when negative affects are salient (signaling mechanism). Both mechanisms are stronger in the presence of asymmetric information. Managerial Summary The purpose of this paper is to advance our understanding of how CEOs' affective traits influence firm valuation by both, CEOs themselves and investors. The effect of CEO emotions is plausibly particularly pronounced for start‐up firms, whose success prospects critically depend on their leaders. My results suggest that CEO emotions impact underpricing in initial coin offerings twofold. First, negative emotions are associated with CEOs choosing an underpricing level that closely conforms to their peer firms' average. Second, investors react to negative CEO emotions by demanding higher discounts on firm value. These effects are more pronounced when there is relatively little public information about the ICO firm. My paper is accompanied by artificial emotional intelligence software for implementation in practice and future research.

Date: 2021
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