Management Accounting Section Midyear Meeting

Perceived Personality Traits, Firm Forecasts, and Valuation

• In Event: Budgeting and Target Setting I

Abstract

We study how investor perceptions of entrepreneurs’ personality traits relate to firm reporting practices (i.e. financial projections errors and firm valuation) and economic outcomes more generally (firm survival and actual equity investment decisions). We videotaped a sample of 155 entrepreneurs pitching their business idea to an audience of early stage investors, and subsequently obtain personality traits measures from an independent set of raters. We further obtain their budgetary and valuation information from private communications with investors. We show that presence (a component capturing passion, dominance and openness in gestures) and attractiveness correlate with higher (short and long term) financial forecast errors, higher firm overvaluations, lower rates of survival, yet higher likelihood of receiving outside funding. We argue that perceptions of entrepreneurs’ personality traits can be one vehicle through which early stage investors can anticipate financial misreporting. More generally, we posit that understanding the effects of personal characteristics in a timely manner can be useful to early stage investors in the assessment of investment opportunities, deal structure (e.g. contract design), and ex-post monitoring. Altogether, our study complements the set of available ex-ante information that early stage investors can use to mitigate potential business model uncertainties and (ex-ante) information problems.

Authors

• Marti Guasch, Tilburg University

• Antonio Davila, IESE Business School