Nut up or shut up

I had to think of this immortal line from the movie Zombieland when I read an analysis of analyst reaction to CEOs delivering good or bad news about their company.

CEOs are a special breed of humans. They have a natural tendency to be overconfident and there are more narcissists among CEOs than the overall population. Plus, CEOs tend to engage in all kinds of other risky behaviours outside the business.

One thing CEOs are prone to do is to shift blame on others when they miss targets or have to deliver bad news. Meanwhile, we are often told that part of what makes a good corporate leader a good leader is that the proverbial buck stops with him (or her). In other words, a good leader takes responsibility for bad developments, even if they are not directly his (or her) fault.

The study mentioned above analysed analyst reactions to company earnings calls and the behaviour of CEOs on these calls. In essence, the study looked at how a CEO explained bad news in an earnings call. Did they try to shift blame on others, or did they take responsibility for the bad performance? The theory is that if a CEO nuts up and takes responsibility for the bad performance of his company, even if it is due to factors outside of his control, this improves the perception of integrity among investors, and they will punish a company less for poor performance than if a CEO tries to shift blame.

The chart below shows the results in the form of the average reaction of analyst forecasts to the way good and bad performance is explained by the CEO. If the CEO discusses good performance, there is little difference between the earnings forecasts of analysts whether the CEO is blaming others or taking responsibility. However, the sensitivity to CEO integrity becomes larger when discussing bad news and reasons for underperformance. Here, CEOs are punished significantly in the form of lower earnings forecasts if they don’t take responsibility for the company’s performance. Meanwhile, if they show integrity and accept the blame, that is rewarded with higher earnings forecasts by analysts because standing up and taking the blame implies that the CEO is willing to take action to fix the situation. Thus, when delivering bad news, CEOs really should nut up or shut up, because not shutting up while not nutting up will be penalised by investors.

Analyst earnings forecast reaction to CEO blame shifting

Source: Skarlicki et al. (2023)