UZH study shows: Companies with empathetic CEOs have higher share prices

The Covid-19 pandemic triggered an unprecedented financial crisis. Between February 24, 2020 and March 20, 2020, the value of US companies on the stock market plummeted significantly, surpassing the decline during the financial crisis from 2008 to 2009.

At the beginning of the pandemic, several CEOs made statements in conference calls with financial analysts that were not directly related to the current business situation, but expressed concern for their fellow human beings. These expressions of empathy are the focus of a new study by researchers from the University of Zurich, the London School of Economics and Political Science and Cambridge Judge Business School.

The researchers analyzed 510 CEO conference calls from 448 large US companies during the Covid-19 pandemic. Despite the human challenge posed by the pandemic, only about half (51.8 %) of the CEOs expressed concern for the well-being of their fellow human beings. Moreover, most of these statements were superficial and did not contain any concrete protective or other measures. Nevertheless, the share prices of these companies outperformed those of companies whose CEOs did not comment on the impact of the pandemic.

"I mean, every time people are ill or tragically lose their lives, it's a much more important issue than anything we report on today. I just want to say that briefly." - Statement by Strauss H. Zelnick, CEO of Take-Two Interactive Software, in a conference call during the Covid-19 pandemic

Surprising effect of lip service

First author Lauren Howe was initially surprised that some CEOs expressed their concern for the health and safety of employees, customers and others affected by the virus in the conference calls: "At first glance, these statements seem to be of little relevance to financial analysts and therefore should not influence them."

At the same time, conference calls are one of the most important ways for investors to get in touch with CEOs live. What leaders say in these conversations and how they do so can have a significant impact on the markets. During a crisis like the Covid-19 pandemic, it is therefore plausible that investors pay extra attention to these direct exchanges.

In numerical terms, a single declaration of care was associated with an increase in cumulative returns of 2.49 percentage points. Considering that the average market value of the equity of the companies analyzed was approximately USD 3.17 billion, this effect resulted in approximately USD 78.9 million of company value being retained after the crisis.

"Obviously, the coronavirus is making the situation very volatile. [...] I would first like to emphasize that the safety of our employees, partners and customers is our top priority." - Statement by Zebra CEO Anders Gustafsson in a conference call during the Covid-19 pandemic

Corporate management is about performance and people

In further analyses, the researchers found that compassionate statements during the crisis were associated with lower stock volatility, but had no impact on analysts' estimates of future earnings. The results suggest that market participants discount a company's future earnings less heavily - and view stocks as less risky - when the CEO expresses compassionate concern. This is notable in that, again, these were general affirmations with no associated plans, actions or direct financial implications.

The results underline the importance of CEOs showing humanity in their communication and the impact this has on investor perception and company performance. CEOs who only focus on performance miss the opportunity to show the expected care for people. "Corporate governance is as much about performance as it is about people," adds last author Jochen Menges. "Our study shows that it pays to care about your fellow human beings - even in conference calls with analysts and investors who are expected to only care about performance."

"First of all, the whole coronavirus situation is a human situation. It's kind of a human tragedy." - Statement by Autodesk CEO Andrew Anagnost in a conference call during the Covid-19 pandemic

The underlying study by Howe et al. can be accessed here.